Deckers Outdoor Corp (DECK) 2009 Q1 法說會逐字稿

Good afternoon ladies and gentlemen.

Welcome to the Deckers Outdoor fiscal 2009 earnings conference call.

(Operator instructions).

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

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

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

The Company cautions you that a number of risks and uncertainties, 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 in its earnings press release and in our SEC filings, including 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's sales are highly sensitive to consumer preference, to general economic conditions, to the weather, and to the choice of its customers to carry and promote its products.

Deckers intends that all of its forward-looking statements and this call will be protected by the Safe Harbor provisions of the Securities Exchange Act of 1934 as amended and the Securities Act of 1933 as amended.

Deckers is not obligated to update its forward-looking statements to reflect the impact of future events.

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

Please go ahead, sir.

Well, thank you and thank you to everyone joining us today.

With me on the call is Zohar Ziv, our Chief Operating Officer.

Zohar is also operating as the Company's principal financial and accounting officer until a new Chief Financial Officer is appointed.

He will walk you through the numbers in more detail shortly.

We're very pleased to have begun the new fiscal year with strong results.

While there are a lot of indications that 2009 is going to be a challenging year for the world economy, we delivered another very strong performance that once again outpaced expectations.

For the first quarter, sales were $134.2 million, an increase of approximately 38% over last year's first quarter and above our guidance for sales growth of approximately 22%.

First quarter diluted earnings per share were $0.93 versus $0.86 a year ago, which was also well ahead of our guidance.

Our teams did a great job of managing inventories at a level required to meet our sales levels and finally, we ended the first quarter with $230 million in cash, cash equivalents and short-term investments, an increase of $47 million over the same period last year Now to what drove our results.

The UGG brand's positive momentum from the holidays clearly continued into the first quarter as sales increased more than 60% for the second consecutive quarter and I believe it's worth noting that on a trailing 12-month basis, UGG brand net sales have now surpassed $600 million.

Since we first launched a Spring line in 2005, we significantly broadened the product offerings to include a variety of boots, sandals, casuals and slippers for men and women.

And as a result a very strong sell through the past four years, we entered 2009 with more shelf space at retail for our Spring collections than ever before.

This is fuelling increased awareness of our Spring line, which in turn is helping further establish our UGG brand as a true year-round brand.

It is also attracting new consumers and creating repeat purchases from consumers who were only familiar with the UGG brand of the cold weather product.

Our strong Q1 performance was driven by demand for the entire line highlighted by the classic and (inaudible) boots in spring colors, the low pro button boot and our line of comfort sandals to name just a few.

Our growing number of concept stores is also creating a meaningful impact on the UGG brand's evolution.

And equally important on our P&L.

We added five new stores since last spring, San Francisco, New York, Beijing and two in London.

And with same store sales growth of 29.3%, our retail sales increased 162% to almost $14 million in the first quarter.

As we outlined on our year-end call in February, our plans are to open two additional domestic locations and five overseas locations in 2009.

In addition to the great selection of product, the UGG brand's identity of the premium lifestyle brand is now consistently built and re-enforced by an excellent advertising campaign featured in publications such as Vogue, Vanity Fair, Glamour, Instyle and Teen Vogue, and on billboards in high traffic areas in key cities like New York, London, Los Angeles, San Francisco and Chicago.

We also are opening 30 to 40 Shop-n-Shops in the U.S.

in 2009, as well as 50 Shop-n-Shops overseas compared to 40 in the U.S.

and 29 overseas last year.

We've now completed our prebook for Fall and despite the challenging markets the majority of accounts have planned their business up versus the second half of 2008.

When combined with the fact that we had no meaningful order cancellations in the first quarter, it really speaks to the current strength of the brand and underscores its importance to our retail partners.

First quarter sales for the Teva brand were lighter than expected.

Many retailers are now choosing to take delivery of the spring product closer to season.

We had hoped to make up for this shift with more at-once orders during the first three months of the year, however that business didn't materialize to the levels we projected and as a result of several factors, namely the challenging retail environment and its impact on open to buy dollars, as well as cold or wet weather in many parts of the country.

At the same time Teva product sales were negatively impacted by the bankruptcies of three meaningful accounts, GI Joe, Boaters World and Sportsman's Warehouse during the first quarter.

In spite of all the challenges, our team did a better job of managing inventories which were down nearly 18% versus the same time a year ago.

And we head into summer with very clean fresh product in both our wholesale channels and our distribution center.

Since the start of April, we've seen some encouraging sell through data on several men and women's key styles.

And we would expect this trend to continue as temperatures begin to warm.

The feedback on the expanded product line has been positive and retailers continue to tell us that Teva has definitely re-emerged as one of the few core footwear brands in the outdoor space.

Therefore, we remain cautiously optimistic about our prospects in the second quarter, but will continue to operate conservatively with regard to expenses and inventory until our visibility improves.

The Simple brands business was not immune to the poor economic climate that we were operating in during the first quarter.

In the U.S.

we experienced a higher level of cancellations than normal, which obviously impacted performance, but we believe this was in line with industry average.

We also had to contend with lower than expected international sales in Japan and Europe.

All this contributed to a 13% decline in sales for the quarter, compared with a year-ago, partially offset by double-digit increase in internet sales.

It was obviously a more challenging quarter for Simple than we expected.

That said, we feel confident that the brands position is the leader in sustainable foot wear, strong and growing.

And that the product line led by EcoSNEAKS continues to resonate with consumers and is gaining traction in key accounts, even during challenging times.

Earlier this month, we began shipping key products from the new Spring 2009 collection to 200 Journey stores and all Nordstrom locations.

This coincided with the debut of our new advertising campaign from JWT, less is greater than more, which we launched with national and local print, internet and gorilla marketing efforts.

We've seen strong weekly sell-through rates on several styles, including the women's satire EcoSNEAK and the men's tuba EcoSNEAK, which are the featured advertising styles of the spring 2009 season.

However, as a result of the poor retail environment, we've decided to defer some of the incremental marketing spend that was previously planned for the remainder of the year.

As we look ahead, we remain focused on maintaining our sustainable leadership position by continually innovating the product line.

We'll also continue to expand our distribution by partnering with retailers that are committed to rowing the brand for the long-term.

Now with regard to the TSUBO brand, the team's been working hard to build distribution for the fall relaunch of the brand.

We have secured select orders with Macy's and Dillards and we continue to have encouraging conversations with both regional and independent retailers across the country.

So we remain optimistic about the long-term potential of this business.

However, since prebooks of the TSUBO brand have been harder to come by, we'll be pulling back on some of the additional marketing investments for this year and we will reduce the original plan of an incremental $10 million spend for TSUBO and Simple by about half.

As we discussed on the last call, in March we acquired the outdoor brand Anhu.

We are very pleased with the management team that joined us and believe that over time there's an opportunity to leverage our position in the outdoor industry to expand Anhu brand and grow our share of the outdoor lifestyle market, especially in women's.

Now before I turn the call over to Zohar to review the financials, I wanted to point out for those that might have missed it that Deckers was named to Outside magazine's list of the best places to work for the second consecutive year.

Everyone here takes tremendous pride in this special recognition and we believe it speaks to the great culture and environment we've all helped to create at Deckers.

Zohar?

Thanks, Angel.

For the first quarter of 2009, net sales increased 37.6% to $134.2 million versus $97.5 million for the first quarter of last year.

Including sales from the wholesale division, as well as the consumer direct business, our net sales of products increased 66.9% to $91.4 million versus $54.8 million for the first quarter last year.

Net sales of Teva products decreased 5.7% to $35.6 million in the first quarter, compared to $37.7 million in the same period of 2008.

In Simple brand, net sales decreased 13.1% to $4.4 million for the quarter versus $5.1 million in the same period last year.

Combined net sales of the Company's other brands TSUBO and Anhu, which we did not own during the first quarter of 2008, were $2.9 million for the first quarter of 2009.

Included in these numbers are e-commerce sales for all brands of $16.2 million, up 3.5% from $15.6 million from the first quarter 2008 and retail sales of $13.9 million up 161.9% from $5.3 million in the prior year period.

Also included in the brands sales numbers, international sales for all brands increased 71% to $32.2 million, compared to $18.8 million in the first quarter last year.

In domestic sales increased 29.6% to $102 million compared to $78.7 million in 2008.

Our gross margin for the current quarter was 43.9% compared to 47.3% in the first quarter of last year.

The year-over-year decline in gross margin was primarily due to our wholesale business growing at a higher rate than our e-commerce business for the first quarter 2009.

As well as high levels of closeout sales than in the first quarter 2008.

First quarter 2008 margins were also positively impacted by a reduction in the estimates for sales returns.

Total SG&A expense for the quarter was $39.6 million or 29.5% of net sales compared to $29.1 million or 29.8% of net sales a year ago.

The planned increase in SG&A in absolute dollars resulted primarily from an increase in payrolls, marketing and other selling expenses including $2 million of additional marketing investments for Simple and TSUBO and six new retail stores that were not open in the first quarter last year.

Interest income was approximately $0.6 million in the first quarter, compared to last year's first quarter interest income of $1.4 million.

This decrease was the result of our decision to shift a greater percentage of our cash, cash equivalents and short-term investment to safer, more liquid and lower yield and government securities, as well as lower market interest rates versus same period a year ago.

Net income for the first quarter was $12.3 million or $0.93 per diluted share, compared to $11.3 million or $0.86 per diluted share in first quarter of last year.

Turning to the balance sheet.

At March 31, 2009 our overall inventories increased 34.3% to $66.4 million versus $49.4 million a year ago.

By brand, UGG inventory increased 61.3% to $43.4 million, Teva inventory on decreased 17.8% to $15.1 million and Simple inventory increased 18.3% to $5 million.

The increase in UGG inventory was due to the increase in spring and fall orders currently in our books and the growth of retail inventory due to the increase of our stores from last year.

The increase of (inaudible) carry over which we discussed last quarter was sold in Q1 and we continue to manage our inventory to meet our sales and continue to feel very comfortable with our inventory levels.

In addition, at March 31, 2009, we have cash, cash equivalents and short-term investments, totaling $230 million compared to $183.4 million at March 31, 2008.

In account receivables were $56.3 million compared to $40.7 million at March 31, 2008.

With regard to our outlook.

Based on the UGG brand better than expected first quarter results and the partial benefit of the reduction of the incremental marketing expense, we're slightly adjusting our 2009 guidance.

However, we are only flowing through a small portion of the earnings upset from the first quarter to our full year earnings outlook primarily due to lower sales projections for the Teva, Simple and TSUBO brands as a result of the challenging retail environment and the shifting of approximately $2 million in expenses, mainly marketing into the second quarter from the first quarter.

We now expect full year revenues to increase by approximately 7% to 9% over 2008 levels versus our previous guidance of approximately 6% to 9% growth.

For the full year, we now expect UGG brand sales to increase approximately 8% to 10%, up from our previous expectation of approximately 6% to 8% growth.

For the Teva brand, we now expect sales to be down approximately 4% to 7% compared to our previous expectation of down approximately 2% to 5%.

For Simple brand, we now expect sales to increase approximately 5% to 10%, down from our previous expectation of approximately 20% to 25%.

And for the TSUBO brand, we now expect sales to be approximately $5 million to $7 million down from $7 million to $9 million.

We still expect Anhu brand sales to be $4 million to $6 million.

For the full year, we now expect diluted earnings per share to be flat to slightly up over the non-GAAP diluted earnings per share of $7.27 we reported in 2008, which excludes the noncash write down of intangible assets as discussed in our previous earnings release.

This compares to our previous guidance for 2009 diluted earnings per share to be flat to down slightly.

Our forecast is based on a full year gross profit margin of approximately 45% in 2009 versus 44.3% in 2008.

And SG&A, as a percentage of sales of approximately 25%.

As Angel discussed earlier, we have decided to defer approximately half of the original $10 million of incremental marketing expenditure we had planned for Simple and TSUBO in 2009, which will be partially offset by lower than expected interest income due to the recent decline in market interest rate as previously discussed.

We still anticipate the Anhu brand to have a negative impact of approximately $0.06 to $0.08 per diluted share for the full year of 2009.

For the second quarter, we currently expect revenues to increase approximately 10% over 2008 levels and we expect to report a diluted loss per share between $0.10 to $0.15.

Our forecast is based on a gross profit margin of approximately the same as last year and is important to note that international sales have historically made up a greater percentage of total sales during the second quarter compared to our other three quarters as we typically ship a significant amount of fall products to our distributors in June.

Also, international distributors carry a lower gross margin than domestic sales.

In addition, we shifted approximately $2 million in expenses, mainly marketing, into the second quarter from the first quarter and therefore we expect SG&A as a percentage of sales during the second quarter to be approximately 43% versus 31.2% in 2008.

As a reminder, a significant amount of our operating expenses are fixed and spread evenly on an absolute dollar basis throughout each quarter.

Therefore, this has the greatest impact on our earnings in our lowest volume sales quarter which has historically been Q2.

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

Angel?

Thanks, Zohar.

I'm very proud of everything that we've been able to accomplish over the last several years and even more so is our ability to keep the momentum going in the midst of this recession.

We recently held our global management meeting where we brought together our senior management team, brand managers and division heads from around the world.

It was an incredibly highly productive few days, full of energy, focus and excitement about what lies ahead.

We spent a great deal of time fine tuning our short and long term goals for each brand and for each division.

And what was abundantly clear was that we have some of the most talented people in the industry.

This gives me great confidence that we will continue to be successful at gaining market share, at expanding our international presence and at increasing profitability and shareholder value well into the future.

Operator we are now ready to open the call up for questions.

Thank you sir.

Ladies and gentlemen, we will now begin the question and answer session.

(Operator instructions).

And our first question comes from the line of Jeff Klinefelter with Piper Jaffray.

Please go ahead.

Yes, thanks guys and congratulations on a great start to the year.

The first question is really on, if you could help, Angel, in framing this up for us, on the UGG brand and the composition of the UGG brand, I think there's still a concern that it's largely skewed towards the boot styles, the classic boot styles in particular.

Can you share with us some rough idea or percentages of the classic boot or the total boot style versus the overall UGG revenue on a run rate basis this year versus last year or maybe two years ago.

We haven't broken out percentages, but if you look at the line, visit one of our key retailers like a Nordstrom for example, you'll see some things there that a couple years ago you might have been surprised to see UGG's name on those kinds of products.

The wedges we're doing, the sandals, the cardie boot, which I remind you was not in the line two years ago.

That is a product built on the classic platform, but I wouldn't call that a classic product.

It's not a sheep skin upper.

Across the board, consumers have been responding to the comfort platform that the brand represents.

We've always said this is a brand really driven by comfort more than any other attribute.

It happens to be that originally sheep skin was the way we delivered comfort.

But we're now diversifying the product in such a way that comfort is being delivered with varying degrees of using sheep skin and some of our products that are selling quite well we have no sheep skin on the product at all.

It's just up against other similar products.

The consumer finds our brand to be more comfortable.

The style is also very appropriate to the season and we really have done a good job with coloration and fabrication.

So you know, all footwear brands are managed from, should be managed from a broad perspective, really understanding what drives the core attributes of the brand and then being able to innovate around those things.

I think we've done a great job of that and the consumer is validating that, obviously.

Okay, so as a rough proxy you think people should be able to look at your core distribution and look at the assortments and get a sense for the composition of your revenue?

Absolutely.

As we move closer to the Fall season, you'll see the lines start to shift and more impact and more importance will be on the more traditional styles.

But even there, we've diversified significantly.

That started a few years ago with a Metropolitan collection.

It continues to evolve with a variety of different styles around the theme of a sheep's skin upper boot and shoes.

Certainly you look at the men's product, cold weather product that we've shown very well for this next fall.

It's not the UGG you thought it would have been a few years ago.

That's what's exciting about it.

My other question is really on the other brands and the strategy to market them, but now with less dollars.

But also, this idea that it was actually a very good time and still very likely is a good time to launch new brands and go after shelf space that's being dislocated in the industry.

It seems, given the challenges you're having with Simple so far this year and reading your release about the bankruptcies in the independent retail community, and then also your decision to cut marketing back, has something changed in the last few months with respect to your view of the viability in the marketplace of launching new brands?

Well, really what we've done is just gotten down to the grassroots, if you will.

The retailer has demonstrated they're very reticent to invest in the unknown versus the known.

So you see in our case UGG is winning and the other brands are sort of in the mix with the rest of the shoe industry.

Retailers are very, very cautious about their option to buy, obviously credit's difficult and those dollars need to produce.

So they want to bank on things that they know they're going to get turn and margin on.

The other thing that's important is that, the battle is being fought at the point of sale.

So media isn't as relevant as we thought it would be.

So when you see adjustments being made on TSUBO and Simple, we're really dialing back the media spend.

You won't see the prevalence in the print publications that we had anticipated doing, but we are still going to drive the presentation at point of sale with VSM, which is what we call vendor support money.

We're doing more clinics.

We just recently did a series of clinics and product events at Nordstrom around Earth Day that were very successful.

Very solid sell through on Simple's product.

It's a slug fest out there.

It's not easy.

The other thing we're excited about too, though, as I mentioned on my comments, the introduction of the new styles with Simple just began to ship in the month of April.

We're getting great traction on those and that's really the product line that we've been anticipating and looking forward to with EcoSNEAKS and we're getting good response on that.

TSUBO, we have to wait until Fall.

That's a Fall product that we decided to drive in the market.

It's becoming pretty obvious that the retailer doesn't have the stomach for huge commitments of new inventory.

They really want to see how stuff is going to sell through before they line up behind it.

We have to prove ourselves in the market.

Just one clarification on your Fall carryover product you said you sold that out in Q1 this year, I thought you were holding that over for fall of 2009?

We were holding it over, but since we had orders we sold it.

Most of the things were the slippers and classic boots.

They were sold in Q1.

Okay, so that materialized with, since your last time you communicated with us.

You're completely clean on your carryover product?

Well the increase, and you know, we didn't quantify it last time.

The increase of the carryover from year-over-year in last quarter was only $6 million.

We cleaned that increase during that quarter.

Okay, all right, thank you.

Thanks.

Our next question's from the line of Chris Svezia of Susquehanna Financial Group.

Please go ahead.

Good afternoon everyone.

Congratulations on a nice job in terms of execution.

I want to, maybe if you could just talk about the backlog for one second and your prebooks, if you could.

Can you just maybe add some color.

Last time when you were coming into the fiscal year your back logs were up 41%.

I'm curious, maybe just talk more about how your prebooks look at this point in time relative to that increase.

I would assume it probably wouldn't be up that much, given the back drop into what's happening with the other brands.

Maybe talk more about what's happening on the prebooks and how that looks.

We have not disclosed the prebook at this time, but as Angel said, basically the full orders are all prebooked by now.

We have a very good and strong visibility as to the remainder of the year.

Okay.

But, Chris, if you're asking, if last time we talked it was 40% and up.

It's not to that level.

Right, no that's fair.

At what point in time are retailers, what are they telling you, at this point about how they're looking at Fall?

It seems like sentiment is incrementally improving in the footwear business and I'm kind of curious, is the sentiment sort of improved in terms of the commitment to take on and to prebook a lot more product or are they still, incrementally looking to more of one sort of business and still holding off?

In other words, is sentiment really starting to improve at all?

Well, just my recent travels, yes, I've seen a modest improvement in sentiment and attitude and expectation.

I think that the first quarter of the year wasn't the blood bath that some people thought it was going to be.

People are weathering the storm.

That said, as I mentioned earlier, they want to put their dollars into proven brands and proven product and also they're really not that interested in experimenting with a lot of untested styles, etc.

So, as a result, we do have people booking UGGs stronger than in the past year.

Full expectation is that they'll continue to sell that product through and sell it at the same level they have been.

The consumer out there still seems to have, as we continue to experience a love affair with the brand and the diversification of style and color and materials, creates excitement at retail combined with our retail presence, which allows us to showcase all the new things.

One thing that great retailers haven't forgotten.

They have to be in the business of exciting consumers at retail.

As cautious as you want to be, you've still got to get that consumer motivated enough to come in and look at new things and buy new things.

They're just being cautious as to which new things they put out there and which brands they put it out there from.

We're in a very enviable position with our UGG brand and that's allowing us to have some great benefit.

I think, hopefully we'll be able to drive consumers into the store and help retailers achieve their goals with UGG and obviously the consumer will buy other products too.

That's the goal.

There's excitement about that with this brand.

And Angel, has the distribution in terms of the key retail partners changed to any degree or does it continue to be the same retail customers you basically looked at in Fall 2008 in terms of driving the business.

Has there been any notable change in terms of U.S.

wholesale distribution?

No there hasn't been.

It's still been pretty much the same core group we have.

Where appropriate, added doors.

If a request is made to add more doors, we have also, as I mentioned, we're expanding our Shop-n-Shop and our overall presentations.

I think what's happening with the brand is we're just gaining market share inside the retail environment and I think we now have the breadth of product to leverage that gain in market share across the 12-month basis.

Okay, that's helpful.

And Zohar, maybe if you could just help for one second here.

On your second quarter outlook, in terms of the top line growth, can you maybe just add a little color, how we should look at, to some varying degree the different aspects of the business?

Given how strong UGG was during the first quarter and just based on the inventory piece, but then again, how you're guiding for the year?

I just want to get some idea about how we should be looking at second quarter in terms of maybe the UGG growth if you had a little color about that if you could?

Well, we can talk about it in the context of the years and we indicated that Teva is going to be down.

You were probably see the increase for the quarter mainly coming from the UGG brand.

You will see that Teva is probably going to be slightly down from last year.

The biggest of the carriers will come from UGG.

Last question I have here, just on e-commerce business.

I guess surprising to see it only up 3%.

I think you referenced that Simple business was actually up in terms of e-commerce.

Maybe just add some color as to what was going on in the e-commerce side of the business, just given how strong some other elements of the business were.

Obviously, it seems like UGG is a big piece.

I'm curious what was going on there.

In years past, as we were developing our distribution model for the first half of the year, particularly Q1, we were building distribution with Spring product and a lot of consumers just didn't have access to it so they went as a default site to find product to our site.

Now that we've done a better job of executing against distribution and our sell end has been solid against spring, it's clear that retail consumers are finding product available at retail.

Because if you will notice, our retail stores had a very significant uptick in the first quarter.

It's just a matter of you know, the Spring line is now more available than it was before.

It was readily available in on our website in the last couple years.

And retail consumers went there to find it.

Now they're finding it in the other stores.

So we're not that surprised about that.

The other thing to note is that our e-commerce approach is not anywhere near as aggressive as it would be, let's say for a Zappos.com.

We don't do the free shipping and all that stuff.

I think again, the consumer is going to slide toward the retail availability.

If they can find the product without paying the shipping, they'll buy it where they find it

Thank you.

Our next question comes from the line of Jeff Mintz with Wedbush Morgan Securities.

Please go ahead.

Thanks very much.

Just a couple additional questions here.

Angel, are you starting to use your retail stores to kind of test styles and then share the data you get from that with some of your retail partners?

And if so, what's been the reaction to that from those partners?

Well we have been doing that all along and it's not so much the styles as it is, let's say colors.

So we have a really good idea of what kind of performance we're going to get from the preline, how people react with, and we also know from the response that we've had in our own stores to certain color waves or ideas around product like Descartes for example and what it does is allow us to refine the approach.

By the time we do go to wholesale with an assortment, it's been well-culled.

I mean, it has been paired down to what we feel are the strongest potential products.

As I've had several retailers tell me when they look at the Fall 09 UGG line, it's hard to decide what not to buy.

Because, we look at the line the same way they do.

We look at it as a buyer would.

We try to keep the line as tight as we possibly can and try to have the line yield the best return.

So if nothing else, what the retail stores are doing is allowing us to think just like a retailer because we are a retailer.

It's giving us insight that we might not otherwise have.

It's a combination of things, style, color, it's a size of the line, number of skews.

A lot more skew discipline goes into the discussion when you know you only have X amount of space in a store to display product.

Okay, great.

That's helpful.

Turning to the question of the ad spend.

You talked about deferring the other $5 million.

Is that kind of a deferral with a specific date in 2010 or is it more deferred until things improve and you think it would be useful to spend?

Yes, we think we will defer it until we see signs from retailers that they're back in the mood, to begin driving things into the market.

There's just a lot of very gun-shy people out there right now.

I don't feel it's wise to spend the money if you're not going to get the return in terms of bookings.

We're going to hold off.

Keep our powder dry.

Okay, on the international business, was there any kind of a big shift in terms of where the international business is being done by country?

Compared to previous quarters?

Or is it still pretty much dominated by the UK?

Still pretty much dominated by the UK.

That's still a significant growth market for us.

We expect in the future that we'll have other markets evolve into very important position.

As I've mentioned in the past, Germany was up.

We're just getting started.

Scandinavia is fairly undeveloped.

We've had some excellent continued growth in Benelux this first quarter.

I think one of the things happening in Europe, particularly the availability of, and new colors of Spring product have given more extension to the demand for a classic type of product from fourth quarter, well into the first quarter and consumers are now seeing new colors they didn't anticipate and some new excitement there.

So retailers outside the U.S.

are starting to build a Q1 business that they didn't know they had.

Just like we learned to do that a couple years ago.

Okay, thanks and Zohar, can you remind us, did any Anhu sales fall into the first quarter or did that deal essentially get closed after the sales were done for the first quarter?

The deal was closed in the first week, I believe, of March.

So we had a very, very small amount of sales for one month for Anhu.

Okay, great, thanks very much and good luck

Thank you, our next question is from the line of Todd Slater of Lazard Capital Markets.

Please go ahead.

Thank you and great job everyone.

Thanks, Todd.

Inventory growth showed significant deceleration from fourth quarter to first quarter.

Congratulations.

Thank you.

Can you talk about how you're managing the inventory going forward if we should continue to expect this increase to decelerate, maybe not at the same rate, but nicely over the next few quarters.

You'll probably see the deceleration, Todd, the biggest piece of the increase of the inventory this quarter was really had to do with the Fall items that we had to bring.

It has to do with factory capacity and our distribution center, capacity to process the goods.

So what you've seen is an increase in the Fall product that came this year vis-a-vis last year.

So you'll see the, as you said, the decrease in the inventory growth rate in the next few quarters.

Okay, that's great to know.

How about if you can give us a sense of your ability to lower cost of goods over the second half given some deflation, raw material costs and other areas and have you assumed any of these types of cost reductions in your model?

No significant cost reduction or savings reduction from the cost of the goods.

Our cost is being negotiated in advance when we agree with the factory as to the costs of the products.

So those costs have been established prior to the decrease of costs that took place in China.

What you will see is factoring into our guidance and into our margin, we'll get some benefit on the freight side.

Because of the lower oil prices.

You'll see freight coming down.

That will impact positively our margins.

But, the benefits that we will see, there'll be more from a cost reduction, you'll start seeing them coming more next year.

Okay.

I don't know if I heard correctly, but you said you sold your excess product, your excess Fall carryover in the first quarter.

The increase from year-over-year was sold, yes.

The increase was sold.

And did that affect your gross margins for UGG?

How did the gross margins come out for the UGG product in the first quarter?

Not on those items.

Those items were sold at full price.

Okay, and how about the overall UGG gross margin versus your expectation in first quarter?

Well, the overall UGG margin is, depends, if you're talking about the total margin, we're slightly down because of the reduction of the e-commerce business.

But on the wholesale basis --

How about the international mix?

Does that hurt the gross margin as well?

It hurts it some, yes.

As international is growing it's hurting it some.

Is that the sort of same kind of picture you envisioned for the second quarter as well?

How do you see the gross margins in the second quarter coming out.

As we said it's going to be approximately the same as last year, which was around 39%.

The main driver there was the largest proportion of international business vis-a-vis the quarter, which is our smallest quarter.

Internationally should we expect any of the structure to change in 2009 in terms of distributor slash potential.

Well you know, we've talked about the change in Japan so you will see that this year, but if you're referring to the European one you're not going to see any change this year on the distributor front.

Okay, so 2010 and beyond.

About, yes.

And then lastly, just, I was hoping you can give a little more color and follow-up to Jeff's question on sort of the nonclassic styles.

In terms of how they are selling you know, either relative to your ownership or your expectations, the rain boots, the fluffies, I think which had a sizeable increase.

I know it's early in some markets, but there are others where you've had warm weather and wedges and so on, what have you seen those, on those styles sell throughs relative to how you own them?

Well, we've seen, uh, okay, let me, Descartes continues to sell across all parts of the country.

Excellent sell through on that.

Depending on weather the rain boots perform well.

We didn't, that was not a huge item in our expectation.

It was an important item for us to do and we're going to carry that through, but that performed to expectation.

We're getting excellent sell-through on the wedges and sandals, especially where the weather has turned.

Those have been a little bit surprising to me.

I'm very happy with the performance of those.

The colors have been well-received and retailers have been pretty happy with what's been happening there.

It kind of varies by region and where we are in the transition to summer.

But across the board, good sell throughs.

I can't think of anything that I would call a disappointment from our perspective.

So I think we're looking pretty good on that front.

Excellent.

Thank you very much.

Appreciate it.

Thank you, our next question comes from the line of Mitch Kummetz with Robert W.

Baird.

Please go ahead.

Thanks.

I've got a few questions.

Let me start with your Q2 guidance.

Zohar you're saying 10% sales growth, you had 38% in the first quarter, what's going on there?

Is that a function of a tough comparison and maybe some holiday momentum carrying into the first half of Q1 which really drove a big increase there?

Is there shift in business happening across the two quarters that would cause the sales to decelerate to that degree going from Q1 to Q2?

No, I would say it's a reflection of the current retail environment.

As I indicated, it would probably be slightly down over last year.

Simple is probably going to be flat.

And you know , UGG is going to be increasing

Okay.

And I guess that leads into my next question, your guidance on UGG for the year now is 8% to 10% growth.

Given what you achieved in the first quarter, and probably a double-digit increase in the second quarter based on what you're saying there.

That would imply something you know, I don't know, 2%-4%, 1%-3% over the back half and on how you made the comment that majority of retailers took their fall orders up.

Is there something there that I'm not thinking about?

Are you guys just being really conservative in terms of your assumptions on cancellations or reorders or what you might be doing with your retail stores or e-commerce business to get to not much growth on the back half, given order book you have in hand right now.

Mitch, your math is correct.

And we are being conservative.

Looking in this environment, at this economy, you have to be prudent and to estimate the higher percentage of cancellation than in the past.

So until we get closer to Q3 and see how things are selling in Q4, we've got to take that approach.

Okay, and to Todd's comment on inventory, obviously you managed it down well in the quarter and got rid of carryover inventory, but UGG inventory still up 61% and that's relative to the UGG outlook that's implied by your full year guidance in your Q1 results.

I assume that's an inventory level you're comfortable with.

That's inventory that you have orders for, so is there anything you can comment on that?

Yes, we're very comfortable with our inventory level.

If you look specifically at UGG, the biggest increase, about two thirds of the increase is really related to fall products.

We have to start to bring, as I said earlier, because our factory capacity.

They cannot produce the goods that we need for the time that we need.

So we need to start to bring it earlier.

So it's all clean inventory, we don't have hardly any reserve against it and we're very, very comfortable with our position.

Are retailers also wanting their Fall deliveries earlier?

Do you get a sense of that yet?

I wouldn't say so.

Okay.

Probably same as the last year.

And last question, on the marketing, I just want to make sure I understand this.

So previously you said about $10 million incremental increase in Simple and TSUBO and that's going from $10 million to $5 million, I thought you were expecting that to hit pretty evenly across the quarter, about $2.5 million in each quarter.

Did some of that incremental spending happen in the first quarter or did you already recognize you were going to defer it early on?

Should we be thinking it's about $5 million of incremental spending over the balance of the year, Qs two through four.

Let me talk to the numbers and I have a comment about the marketing program.

As we indicated in the script, about $2 million of net marketing spend occurred in Q1.

And you will probably have a similar amount also in Q2.

And really, as I said, the thrust of it in the first half, keep in mind that TSUBO isn't scheduled to really spend any until Q3 and Q4 when the brand would relaunch with the Fall line.

The bulk was really going to be what we call VSM, vendor support money, money that we would use to impact sell-in of the product.

Give me an order and I'll give you marketing support based on the size of your order.

We will also give you enhanced retail presence and do a whole variety of things.

If I don't get the order book, then obviously I don't spend as much money on that.

And if I don't get the order book I'm looking for, I'm going to pull back on the media spend because it would frustrate consumers to see these beautiful ads in national magazines and then not find the product where they expected to find it.

So we're being very practical and really making sure we have enough money in the mix to support those retailers who support the brands.

The media spend was expected more concentrated in the back half.

Yes, more in the back half.

You spent about $2 million of that in the first quarter, you expect to spend about $2 million more in the second quarter and another $1 million over the balance of the year.

Q2 you get the hit because you had a shift of other marketing dollars by $2 million flowing from Q1 to Q2.

So really in Q4 you're looking at $4 million more in marketing expense than a year ago.

Is that how I should be thinking about it?

Are you talking about in Q2?

The increase over last year?

Mitch?

Mitch, you there?

I think he's just wanting clarity on the -

Part of the shift was included within the two.

But you will see about a $3 million increase in marketing in Q2.

Thank you our next question's from the line of Jim Duffy with Thomas Weisel Partners.

Please go ahead.

Thanks and thanks for taking my questions.

Many you've been asked already.

I just want to make sure I understand the nature of the clearance activity you spoke to in Q1.

So what type of product was it?

Was it you know, inline product which would have carried forward through to the fall season?

What were the channels that you use for clearance and what extent did it have an impact on the gross margins in the first quarter?

Jim, the those were not close out items.

As we said, those were slippers and classics.

We're selling at full retail, at existing distribution channels.

So there hasn't been any impact on our margins.

Talking about UGGs?

Talking about the clearance in general.

I thought in the press release it characterized gross margins as pressure from clearance activity.

So you're talking closeout products?

Yes.

We're going through our normal closeout process related to all the brands mainly Teva and Simple and some in TSUBO and UGG.

So it was a lot of Teva product.

What were the challenge--

And Simple, yes.

What were the channels you used to close that out?

We don't disclose that, but it's traditional normal channels.

Our existing retailers, all of them on occasion throughout the year want to close out product to enhance their margins and drive traffic.

Then we have a variety of traditional closeout vendors, retailers that we use.

But our product doesn't end up in what I would call the bargain basement kind of closeout channels.

Okay.

And then a kind of very general question for you, in your discussions with retailers do you get the sense they're getting to the point where they've got enough handle on the business that they can start to plan on a go forward basis or is there still so much uncertainty that there's a hesitance to do so?

I'm getting a sense that people are now over the initial shock of what happened.

And those folks who have quality operations with premium brands or quality brands, they're heavily into planning mode.

I think most of their bad news they've dealt with.

They've adjusted (inaudible) accordingly and managed their expectations.

We are getting people who are, I think doing a wonderful job of planning for the near term by adjusting their mix and their assortment very expertly, which is the whole key to this thing.

You know, you really have to watch your assortments, you have to watch the peripheral stuff.

Your average margin has to be very strong so it's creating more dependence on the proven kind of products and more struggle for the unproven.

And that's just, when you think about it, that's pretty logical.

That makes a lot of sense.

Now as you look to your Fall order book, have you seen any change in the cadence or timing of the shipments for fall orders?

No, we're consistent with where we were last year and last year we did notice that people wanted their Fall a little earlier.

We're not seeing demand for it earlier than we did last Fall.

Okay and you mentioned, you know, kind of reluctance of retailers to commit up front in general, does that change your strategy for safety stock or inventory to fill orders at all?

Well it does if you look at Simple and TSUBO and Teva.

UGG finds itself in a totally different situation.

Very unique in the marketplace and very enviable position to be in.

We sort of see it from all sides given all of our brands.

Okay, very helpful.

Good luck to you.

Thank you.

Thank you our next question comes the line of Sam Poser of Sterne, Agee.

Please go ahead.

Just a clarification.

You said the SG&A for the full year was going to be what Zohar?

Around 25% approximately.

Okay, and the retail stores, what is the timing and the locations?

Can you talk to some of that for the retail store openings this year?

Yes, we're looking at the, the Japan store, we're looking at Q2.

Three stores in the UK probably towards the end of Q3.

And we are looking for additional stores also in China and in the United States, also we're looking for Q3 for opening of two stores.

One concept and one outlet.

All right.

Okay, Angel, you guys have done a great job over the years of keeping the supply considerably under the demand.

And you have a good deal of your business in California, given the tremendous weakness in California and given some of the uncertainties out there, how are you going to ensure that you continue to keep the supply under the demand?

To keep the brand hot in that manner, given just this particular environment that we're seeing these days?

Well, I don't think we're going to be changing our distribution strategy.

We have always felt that we had the appropriate level of distribution in California given the balance we look to in our distribution mix, okay?

So some people would argue that we're, we're extremely restrictive in California.

We've had retailers in California who have been doing business with us for a long time who want to open another location in a new mall, let's say and we deny that because we've already got the distribution we need in that mall.

So we do have big business in California.

I wouldn't say that our California market is saturated.

I think we've, we've always been very considerate and very cautious about the amount of distribution that we have in any given region of California and we've approached the northeast in the same way, where we've had a great amount of success in the last few years and there's a lot of opportunity to sell product that we don't necessarily take advantage of because we feel it's pushing the distribution to too much availability in any given market.

Why have, you know, six retailers in a mall all fighting over selling the same product.

It makes no sense.

No, I'm really more speaking about the existing distribution, not expanding it, but given the existing distribution and falloff of demand in general in markets such as California.

In our business for UGG we haven't seen a falloff of demand, Sam.

Our business remains pretty strong.

The first quarter results speak to that.

We really have not seen the customer suddenly decide in California that last year they bought three pair of UGG and this year they're only going to buy one or two.

She still wants her three pair of UGGs.

Or maybe now it's four pair of UGGs because now she wants the sandals or she wants a cardie.

So we really haven't seen that.

It's not manifested itself.

Now I understand California is going through a tough environment, tough problem.

There's no doubt about that.

We're realistic about that.

We understand the struggles our retailers go through and we know retailers rely on our brands to help them through this and our brands performing for them.

I guess a question I have is how do you make sure you don't meet the demand this year?

We're just going to keep doing what we've been doing.

Evaluate every single situation, every order based on what we feel is appropriate for the market and we don't let someone, like my mother used to say eat more with their eyes than their mouth.

We don't let someone pile so much product on their order that they're going to struggle.

Okay, thank you very much and good luck.

Thank you.

Our next question is from the line of Howard Tubin of RBC Capital Markets.

Please go ahead.

Hey, thanks guys.

Just in terms of pricing this fall for the UGG line verse last fall is it pretty consistent?

Yes it is, Howard.

Okay, great a question on cash balance.

Any consideration given to buying stock back at these levels?

We've looked into it and we feel that that's not something we should be doing at this time.

We have better opportunities to invest in our business and to keep growing it.

Okay, great, thanks.

Thanks, Howard.

Our next question's from the line of Omar Saad with Credit Suisse.

Please go ahead.

Thanks for taking my question.

Great job this quarter.

Just really one question that I wanted to ask you guys about, I think most of the stuff's been asked.

Can you help me understand the kid's business a little better.

How's that been doing?

How big is that as a percentage of mix.

My daughter's starting to ask me about the product and to buy it for her.

I just want to get a better sense from you guys how you feel about that business?

What the outlook is for it.

By kids, I mean 12 and under.

We feel it's a good business for us.

We feel it's a business we should be in to an appropriate level.

It's important to have quality distribution.

We don't want to compromise the quality of the product in order just to meet the lower price points which happens often in kids.

You know, people who make something that looks like an UGG boot using artificial materials just to get the price point where they need it, it still has the look, we don't do that.

Our product from a production cost, perspective, it's not that much less to make our kids shoes than adult shoes.

Obviously there is a smaller amount of sheep skin used, but we don't compromise the sheep skin and we don't compromise any of the other materials.

We're not looking to have the kids business grow out of proportion to our adult business.

It will always stay to what we feel is an appropriate level based on the demand that we have in our adult product.

Got it.

I mean, can you help me understand what's the relative size.

I imagine it's much smaller than the rest of the business.

Is that a fair assumption?

It's a fair assumption.

We haven't disclosed what percentage our kids business is.

It will always remain a much smaller piece and it will be very limited in terms of skew assortment and in distribution.

I think you'll see our kids product will be, I'm not going to say it's going to be difficult to find, but we really think that the retailers who support the brand in total and have an opportunity to sell kids and do it well, they should sell our kids product.

But we're not going to sell it everywhere just because someone sells a fair amount of UGG product and maybe they don't sell too much other kids products and they want to sell that much more UGGs.

That doesn't make any sense for us.

There are kids specialists out there that are important.

There are retailers out there that do a great job with kids that are important and we'll focus on them.

Perfect, thank you.

Good luck.

Thank you

Thank you we have time for one final question.

And our final question comes from the line of Elizabeth Montgomery with Longbow Research.

Please go ahead.

Hi guys.

Congratulations on a good quarter.

Thanks, Beth.

Zohar, I guess I have two questions.

The first one, just to go back to the Q2 guidance for a second.

If I look back, over the past couple years, normally SG&A doesn't have a significant build.

I know you said there was $3 million in incremental marketing in Q2, but it's still up, SG&A would still be up you know, far more year-over-year in Q2 than it would be in Q1.

I wondered if, is there something else related to the store in Japan or something that's also influencing the SG&A builds for Q2?

There is a combination of things as indicated.

One of the biggest pieces in the growth year-over-year, the retail stores, we have six stores and this year that did not exist in Q2 of last year.

That's a big contributor.

We talked about the marketing.

Now we're going to have it four quarter expenses that were not in last year.

We've also have grown our international business, which is a combination up slightly in Japan but in the UK and the other piece where you have the incremental growth is also in the warehouse.

The peak module went into production in the end of the second quarter of last year.

So the depreciation for that and the incremental cost of that will be in also in Q2.

So those are kind of the big pieces that causes the increase.

And the normal increase of our payroll and cost of living.

The pick module is Q3.

Yes, it's already in Q3, it came into the production the latter part of Q2 last year.

Full Q3 and Q4 last year.

Okay, and not to be too picky, but I wondered what's the incremental marketing going from $10 million to $5 million.

That's a $0.23 cent benefit and I know you said less interest income, but could you quantify how much that would be?

Let me walk you through a little bit.

I'm sure there's going to be question.

Let's discuss it right now.

We beat Q1 by about $0.30 against our guidance.

We deferred about $2 million.

That's a reduction of $0.10.

We're up by $0.20 from Q1.

The defer of the marketing was about $0.23 so we're roughly at $0.43 better.

However, we're reducing Teva, Simple and TSUBO and interest income will be lower by $2 million.

So those subtractions take about half of the additions that we're getting the benefit from Q1 and the lower marketing and that causes us to slightly adjust our guidance from flat to slightly down to flat to slightly up.

All right, that was helpful.

My last one, not to harp on this, but the question that Chris had about the backlog, you said it's no longer 40.

Is that because you're closer to it and you shipped some stuff in Q1.

Just a little benefit a clarification on that?

Well I think it's no longer 40 because the orders, since Paul is basically done the booking, so it's higher than last year, but it's not the same percentage otherwise we would adjust the year accordingly.

With Teva numbers being down and the Simple not growing as we expected before.

It's still up and healthy, but not to the magnitude as it was at year-end.

Let me ask this way.

The UGG backlog, has that changed at all since you ran it?

Has that gotten incrementally better or worse?

Well dollar volume, the absolute dollar is, it went up significantly.

Okay.

All right, thanks a lot, guys.

Thank you.

Gentlemen, at this time I'll turn the conference back to you for closing remarks.

Well thank you, thanks to all of you for listening in this afternoon.

Once again, we're very happy with the progress we've made this quarter.

And continue to look forward to the growth of our brands across the world and with your support we look forward to seeing you on the trail out there.

So appreciate it.

Thanks very much .

Thank you, sir.

Ladies and gentlemen this concludes the Deckers Outdoor Corporation fiscal first quarter 2009 conference call.

Thank you for your participation.

You may now disconnect.