Deckers Outdoor Corp (DECK) 2009 Q2 法說會逐字稿

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

Welcome to today's Deckers Outdoor Corporation second quarter fiscal 2009 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 for you to queue up for questions.

(Operator instructions).

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

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

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

These statements 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 factors section of its annual report on Form 10-K and its other documents filed with the SEC.

Among these risks is the fact that the Company'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 in 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 the President, Chairman and Chief Executive Officer, Mr.

Angel Martinez.

Please go ahead, sir.

Well, good afternoon, and thank you for joining us today.

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

Zohar is also serving as the Company's principal financial and accounting officer until a new chief financial officer is appointed.

Zohar will walk you through the financials in detail shortly, but let me first review our second-quarter performance and some recent highlights.

Overall, we are pleased with our second-quarter results, particularly given ongoing recessionary conditions and the unseasonable spring weather in several areas of the country.

Sales for the quarter increased 12.5%, driven by shipments of the UGG brand fall line to our international distributors and domestic retailers, combined with in-season deliveries of UGG and Teva spring products.

Our second-quarter earnings of $0.22 per diluted share was ahead of our guidance of a loss between $0.10 and $0.15, primarily due to lower-than-projected operating expenses and, to a lesser extent, higher sales.

With regard to expenses, the decision to delay some personnel hires to the back half of the year, combined with a shift in the timing of some marketing projects, positively impacted our second-quarter budget by roughly $5 million.

It is clear that the economic crisis that began in earnest last September continues to affect our consumers spending and it's creating a great deal of uncertainty in the marketplace.

Outside of the value off-price channel, retailers have consistently reported declining monthly same-store sales while several national, regional and local retailers have been forced to file for bankruptcy.

Like any company in the consumer industry, we have not been immune to the slowdown.

However, we still have been able to outpace expectation through the first six months of the year, highlighting the desirability of our brands, our disciplined distribution strategy and the successful execution of our business plan.

The first half of 2009 was highlighted by the strong demand for our much expanded UGG brand spring line that included sandals, flip-flops, fashion wedges and boots.

Some of the top sellers were Halendi, Lo Pro Button, Brooks and Basil.

We had successful pre-book for our most diverse UGG brand for fall ever.

Fall 2009 will feature a broader selection of driving mocs, knit boots, fashion boots, clogs and slippers, men's and kids' collections.

We also had increased demand for our fall 2009 shipments to be accelerated for third quarter -- from third quarter to the second quarter.

In May, our UGG brand was honored with a Partners in Excellence Award from Nordstrom for the second time, making the UGG brand the first multiple winner in the award's 17-year history.

Our Company-owned stores have also been a standout in 2009 with same-store sales up 21.7% year-to-date compared to the same period last year, while the performance of our newer stores contributed to a 139.3% increase in total sales for that division compared to the same period last year.

Internationally, sales rose 48.4% to $78.5 million for the first six months with sales up 71% in Q1 and 36.8% in Q2.

Europe continues to be our strongest region, led by the UK, followed by the Benelux, Germany and Italy.

We are pleased with the progress of transitioning Japan into a subsidiary, where we recently hired a local country manager with experience in building brands in Japan.

We also opened in May the previous distributor-operated UGG brand store in Tokyo after converting it to a Deckers-owned boutique format.

The Teva brand continues to perform well compared to the overall outdoor industry.

Our efforts over the past few years to evolve the Teva brand into an outdoor performance-oriented brand are gaining traction, and the spring '09 line, which includes a broader range of product with new mid- to upper-mid-level price points, is resonating with consumers and allowing us to capture key market share.

According to recent SportScan info, we increased our leading positions in the water and terrain sandal categories by approximately 40% and 6%, respectively, over our spring 2008 and now hold approximately a 33% share of both of these markets.

Even more compelling is the data showing the gains being made by our closed-toe styles, where we continue to make important inroads.

Led by the Omnium, our share of the hybrid water shoe category increased 100% to over 12% versus last year, while the men's Tamur and women's Westwater have helped move the Teva brand into the top three of the outdoor casual market behind Keen and Merrell with a 4.5% market share, up from 1% -- under 1% a year ago.

At the same time, we've significantly improved our inventory control, which is helping reduce closeout sales, preserve margins and enhance profitability, even with a modest decline in revenue.

For the Simple brand, we were up against a tough second-quarter comparison due to the launch of Planet Walkers a year ago that we did not expect to anniversary.

And, like many smaller brands, the Simple brand has been hurt by retailers' reluctance to make significant inventory commitments and, to a lesser extent, a higher-than-normal level of cancellations.

Despite the difficult environment, we are currently seeing good sell-through for our ecoSNEAKS at several key accounts, especially our women's business at Nordstrom and our men's business at Journey's.

Importantly, our inventory levels are in very good shape, and our operating expenses are under control.

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

For the second quarter of 2009 net sales increased 12.5% to $102.5 million versus $91.1 million for the second quarter of last year.

Including sales from the wholesale division as well as the consumer direct business, our net sales of our product increased to 22.9% to $74.4 million versus $60.6 million for the second quarter last year.

Net sales of Teva products decreased 10.6% to $22.6 million in the second quarter compared to $25.2 million in the same period of 2008.

In the Simple brand, net sales decreased 25.2% to $3.5 million for the quarter versus $4.7 million in the same period last year.

Combined net sales of the Company's other brands TSUBO and Ahnu, which were acquired in May 2008 and March 2009, respectively, were $2.1 million for the second quarter of 2009.

Included in these numbers are e-commerce sales for all brands of $5.3 million, down 18.1% from $6.4 million in the second quarter of 2008, and retail sales of $6.1 million, up 100% from $3.1 million in the prior-year period.

The decrease in e-commerce sales resulted from more first-quarter back orders carried into and shipped in the second quarter of 2008 than 2009 for the UGG brand, a decline in our conversion rates for all brands and lower average selling prices for Teva and Simple products.

Also included in the brand sales numbers, international sales for all brands increased 36.8% to $46.5 million compared to $34 million in the second quarter of last year, and domestic sales decreased 1.9% to $56 million compared to $57.1 million in 2008.

Our gross margin for the current quarter was 39.8% compared to 39.9% in the second quarter of last year.

Total SG&A expense for the quarter was $36.6 million or 35.7% of net sales compared to $28.4 million or 31.2% of net sales a year ago.

The planned increase in SG&A in absolute dollars resulted primarily from an increase in payroll, marketing and other selling expenses and six new retail stores that were not open in the second quarter of last year.

Interest income was approximately $300,000 in the second quarter compared to last year's second-quarter interest income of $700,000.

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

We reported non-GAAP net income which excludes the non-cash write-down of intangible assets, as discussed in our associated earnings release for the second quarter of $3.5 million or $0.26 per diluted share, compared to $5.2 million or $0.39 per diluted share for the second quarter of last year.

Turning to the balance sheet, at June 30, 2009, our overall inventories increased 29.1% to $145.6 million versus $112.8 million a year ago.

By brand, UGG inventory increased 43.8% to $130.3 million, Teva inventories decreased 44.3% to $7.9 million, and Simple inventories decreased 45.1% to $3.8 million.

TSUBO and Ahnu inventory made up $2.5 million of the net increase.

The increase in UGG inventory was primarily due to the early arrival of our fall products in order to meet the increase in fall orders currently on our books for shipment in Q3 and, to a lesser extent, Q4, as well as to accommodate customer demand for earlier deliveries versus a year ago.

Due to the projected increase in volume during the second half of the year, we also brought in some product ahead of time to assist our factories with their manufacturing schedules.

In addition, this expansion of our retail division contributed approximately $7 million to the increase.

We feel very comfortable with our current inventory level, as we head into our peak selling season.

In addition, in June 30, 2009, we had cash, cash equivalents and short-term investment totaling $175.3 million compared to $124.8 million at June 30, 2008, and accounts receivables was $63.1 million compared to $54.7 million at June 30, 2008.

With regard to our outlook, based on slightly better-than-expected second-quarter sales coupled with improved visibility into the back half of the year, we are raising our 2009 sales guidance.

We now expect revenues to increase approximately 9% to 10% over 2008 levels, up from our previous guidance of approximately 7% to 9% growth.

For the full year we now expect UGG brand sales to increase approximately 12% to 13%, up from our previous expectation of approximately 8% to 10%.

For the Teva brand we now expect sales to be down approximately 11% to 12% compared to our previous expectation of down approximately 4% to 7%.

For the Simple brand we now expect sales to decreased approximately 5% to 8%, down from our previous expectation for sales to increase approximately 5% to 10%.

And for the TSUBO brand, we now expect sales to be approximately $4 million to $6 million, and we also expect our new brand sales to be approximately $4 million to $6 million.

Now to earnings.

For the full year, we are reiterating our previously issued outlook for non-GAAP diluted earnings per share to remain flat to slightly up over the non-GAAP diluted earnings per share of $7.27 we reported in 2008, which excludes the non-cash write-down of intangible assets, as discussed in our previous earnings release.

Our forecast is based on a full-year gross profit margin of approximately 44.5% in 2009 versus 44.3% in 2008 and SG&A as a percentage of sales of approximately 24.5%.

As you can see, we are not flowing through the entire upside from the second quarter to our annual guidance, even though we increased our annual sales outlook.

This is because a portion of the lower expenses in the second quarter, mainly marketing expense, are shifted to the second half of the year.

We also lowered our full-year gross profit margin expectation to approximately 44.5% from approximately 45%.

This was driven by the lower sales outlook for the Teva, Simple and TSUBO brand as result of the challenging retail environment and a reduction in our sales outlook for our consumer-direct division due to the delay in opening two international stores and lower growth targets for our e-commerce business.

For the third quarter, we currently expect revenues and diluted earnings per share to increase approximately 14% and 10%, respectively, over 2008 levels.

Our forecast is based on gross profit margin of approximately 43% and SG&A as a percentage of sales of approximately 22.5%.

For the fourth quarter we currently expect revenues to decrease slightly and non-GAAP diluted earnings per share to decrease approximately 4% compared to the fourth quarter of 2008.

Our forecast is based on a gross profit margin of approximately 47.5% and SG&A as a percentage of sales of approximately 20%.

The projected decline in sales and earnings is being driven by a shift of sales to the third quarter to accommodate our customers' request for early shipment of the UGG brand.

As you know, our philosophy has always been to err on the side of conservatism, and this has served us well as we have been able to consistently exceed expectations.

Because the fourth quarter is our largest quarter in terms of sales and earnings, we believe it is prudent to be cautious, given the current environment.

Our fourth-quarter projections include a similar level of modest cancellation to what we experienced last year.

Therefore, if they don't materialize, we would expect there to be some potential upside to our forecast.

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

Angel?

Thanks, Zohar.

Well, we are very pleased with our performance to date in 2009 and while there is still a lot of uncertainty about the state of retail and the health of the consumer, we believe we're well positioned for continued success in the back half of the year, evidenced by our heightened sales outlook.

For our UGG brands, fall line is the most complete assortment ever with over 135 styles of boots, slippers and casual footwear.

And with more shelf space we will have approximately 70 domestic and 80 international shop-in-shops, and we are adding two domestic and three international Company-owned stores.

Consumers, as result, will be presented with a much broader presentation at retail versus a year ago.

While most accounts are now just beginning to set their shelves for fall, early reads on sell-through have been solid.

As a reminder, the majority of the UGG brand's business is pre-booked, and despite the recent trend of retailers to buy closer to the season, we see no change in order patterns for fall of '09.

Therefore, we have a very good visibility into the back half of the year, which clearly puts us at an advantage as we forecast our business and plan our expenses.

With regard to Teva and Simple, we believe it is prudent to take a more cautious approach for the remainder of 2009, evidenced by our inventory levels in both brands.

For our Teva brand, we will focus on leveraging the recent success of several closed-toe styles with the spring line to increase awareness of the fall collection in an effort to keep the brand relevant year-round.

With our Simple brand we'll continue to concentrate on generating consumer demand of ecoSNEAKS to increase distribution with key accounts, better placement at retail and more effective marketing programs.

Internationally, our business, led by UGG, is poised for another strong year.

Our two stores in London continue to perform well, while our wholesale business throughout the UK and Europe is showing nice gains.

As we've said before, Europe, particularly the northern half, has the ideal climate for wearing UGG brand products year-round, and we are focused on taking advantage of this by expanding our presence through new distribution agreements and direct operations in the years ahead.

To close, I am confident that our organization will continue to execute at a high level and that our diverse portfolio of brands and strong balance sheet provides the Company with many compelling growth opportunities well into the future.

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

(Operator instructions) Jeffrey Klinefelter, Piper Jaffray.

Just a couple quick questions for you.

One would be with respect to your fourth-quarter guidance, and then more specifically as it relates to this shift, Angel, that you are describing of earlier receipts to handle demand from retailers for UGG, in particular.

Appreciating that some of that product is coming in earlier and you have pretty decently times on a lot of your UGG product, how are you positioning yourself to be able to take advantage of demand as it materializes in Q4 ahead of what might be your conservative guidance at this point, meaning what opportunity do you actually have to chase that Q4 business?

And then my other one would be on international, and just thinking more generally as that becomes a bigger initiative for you and a great opportunity.

Could you discuss a little bit about the distributors you are currently working with?

Are they well-capitalized enough to handle a significant ramp-up in business?

And then how can we anticipate sequencing of these other distributor relationships coming online to accelerate growth?

First of all, in terms of chasing some upside in the balance of 2009, as we said, most of our business is pre-booked.

We do, in core styles, back that inventory up.

We are anticipating that we'll see a better fill-in business materialize in December.

Unlike last December, as you may recall, the bottom kind of felt out at the beginning of the month with people being very reticent to bring in more inventory.

We are anticipating that it will be back to a more normalized fill-in approach, so we might have some upside on that front.

But most of our business, given the lead times, is pretty well in the warehouse for the fall season.

We tend to buy conservatively, especially this year, given the environment, given the retail reality of what's happening.

Retailers are buying very conservatively.

They want their product earlier, particularly UGG.

There's not a lot that's working at retail; UGG is one of the things that's been working throughout the spring.

And so, by extension, the retailers wants that product.

If they can get an extra turn in, in the fall season, they're going to try to get it.

So we hope the consumer continues to support the brand the way they have, that we should all see that extra turn, and that could give us a bit of upside.

But we are not sitting on huge amounts of inventory for fill in; we have been conservative on that front this year, as I said.

In terms of our international distribution, I'd say that for the most part the distributor mix is well-capitalized to the level of growth that we've seen with the brand to date.

Some markets explode.

Like, for example, the Japan market, we feel there's a pretty significant opportunity there, probably one that would outstrip an independent distributor's ability to keep up with it.

We think there's a pretty significant growth potential in that market.

We also feel there's way more growth in the UK, especially.

And there, we really feel that there is an upside opportunity to move toward a subsidiary model in that market sooner than later.

And so that's probably the first market you'll see in Europe where we really make that move.

Just one other quick thing.

On this marketing spend that you're shifting in the back half, do you continue to maintain flexibility, if you choose to continue pushing that out further into 2010?

Yes, I think so.

I think you would be -- right now, this is a year where the most important marketing is the marketing that occurs at retail, at point of sale.

That's where the consumer wants to see the brand come to life, if you will.

That's where retailers want to see the dollar working for them to drive business, once customers are in their door.

So the VSM, the vendor support money that we give, that allows us to be flexible.

It allows us to work with the retailer and support what's working in their stores and their environment.

Some malls are okay this year, some malls are not so good.

As you know, some malls are really struggling.

So it's just come down to as close to the consumer as you can get that dollar, the more impact it will have.

So that is a potential point of savings in the back half?

Yes; we retain that.

We're going to keep that in our pocket as long as we can.

Yes, so if there's opportunity to save, we are going to do it.

Jeff Mintz, Wedbush.

Angel, can you talk a little bit more about the other side of the cost savings in the second quarter, the pushing out of new hires and where those hires might have been?

And are there people that have been hired for those positions now, or is that also still an option for the second half?

Yes, we -- again, looking at the overall economy, we've asked ourselves, look, can we live without filling some positions; and if so, how long?

Without putting anything at risk, we've decided on occasion that we can do without some key hires.

It increases the work load in our existing staff, butt that's the kind of compromise that our staff is willing to make, and they're working extremely hard.

Zohar is a good example.

We've been working to find the new CFO.

We haven't found the right candidate yet, although we have some very appealing prospects.

But Zohar has taken on the dual role.

He is not alone.

There are lots of people in this Company doing multiple jobs.

This is not a year to balloon overhead, and we really that, if we can put it off, we will, but not at the expense of the business.

Certainly, we're not going to avoid hiring a person that is crucial to our success in the near-term.

Okay, great, thanks.

And then, could you just talk a little bit on the spring product and talk a little bit about, in particular, the non-boot product and how that performed in the second quarter at retail?

Yes.

I think, once again, it was a highlight and a high point at retail in footwear.

I think it's proven that the UGG brand is a year-round brand, it's here to stay, and it gives us great opportunity as we move forward into 2010 with confidence now established at the retailer level that we have a product that performs, even in a tough environment.

The sandals, in particular -- we did a fabric boot with a button that was very strong.

The flip-flops are strong.

The wedges continue to perform.

So there have been quite a few success stories in the brand for spring, which -- it's really been a great thing to see.

As you know, we have been working pretty hard on diversification of the product line, and the fact that it's resonating with consumers is a great thing.

About how many additional doors were you in this spring versus last spring?

That's a good question.

I don't know the answer to that.

But it was up year-over-year?

It was up year-over-year, yes.

Okay, great.

Thanks very much and good luck.

Mitch Kummetz, Robert Baird.

A few questions.

First, on the UGG outlook, Zohar, you kind of updated your full-year guidance by brand, but you didn't mention UGG.

I'm backing into something that's kind of up 12% to 13% for the year; is that correct?

Yes; I did mention that it's going to be up 12% to 13%.

Oh, you did mention that?

Sorry, I didn't catch that.

That implies about mid-single-digit growth in the back half.

And, when I look at your quarterly sales guidance, is it fair to assume UGG sales up mid-teens in Q3 and then maybe flat to down low-single digits in Q4?

Let me look at that just a quick second, please.

Yes; that's a good assumption.

Okay.

So on the Q4, then, flat to kind of down -- is that largely because, given the environment that we are in, you don't expect much fill-in business or you're not planning your inventory to capture much fill-in business; and also, a function of retailers just wanting deliveries earlier in the season than a year ago?

Yes; it's a combination of the two things you have just described.

Number one is that there was a shift from -- actual shift from Q4 to Q3 in the orders from the retailers.

They've asked for the goods earlier.

But also, as we have mentioned and especially since Q4 is the refill business, we are being conservative as to the amount for Q4.

On the adjustment to your Teva outlook for the full year, I'm calculating something down 20% plus in the back half.

Is that just the order book didn't come in like you might have thought initially, or were there some cancellations that you see into that fall order book?

Are you also just assuming not a lot of reorder activity in the back half?

Well, as you know, the back half is not Teva's strength historically.

It's more a reflection of what's happening industry-wide in the outdoor industry.

You're seeing in many cases a 30% reduction from year to year.

I think you have a -- specialty retailers in outdoor are doing fairly well.

Consumers want service; they're getting it there.

Some of the larger big-box sporting goods and outdoor retailers are having a little bit more difficult time.

So, again, we really have been getting a lot of good response to the fall product.

We don't have enough of it developed in the pipeline yet at retail for it to be as impactful this fall as we feel it will be in coming years.

So, again, sort of an extension of our conservative nature on that front.

But it's not Teva's strength, anyway.

When I look at Simple, TSUBO and Ahnu in aggregate, you're looking at probably less than $30 million worth of revenues this year across those three businesses.

Correct me if I'm wrong, but I'm guessing that each of those are running at an operating loss for this year.

How do you think about those brands at this point?

Obviously, the environment is tough, so maybe it's difficult to measure what success, if you are having any, in those brands is right now.

But maybe just talk about the need for those brands in the portfolio and what are you looking to do with them.

And then, is the guidance for this year still reflect an incremental $5 million of investment in Simple and TSUBO that I think you mentioned on the last call?

Well, let me talk about the brands.

First of all, this is a business, as you know, that is not static.

New brands surface all the time.

In many cases, new brands and new great items drive some very significant revenue.

It's a business that's dynamic in that sense.

And this is -- a strength of this Company is the sourcing and development of new ideas and new product.

So we really feel that the benefits to be gained by incubating a few new brands, bringing them into the market and developing them pay dividend throughout the entire Company because it leads us to new product ideas and a sharper approach to the market.

That said, every brand has its threshold of success as we move down the line, and there are tripwires for each brand to achieve a number and deliver results in the end that are material to earnings.

And while this year, I think, is a bit of a major speed bump, actually, in developing new and smaller brands, in ensuing years the retailer will always have to show new things.

So weathering this storm is very important for our small brands because they are very well-developed, successful brands with great product, and the consumer always wants great, product.

The retailers always need great product to entice those new consumers.

So it's premature to say that these brands are not valid or viable down the road.

Results will speak for themselves.

And we are realists; we know that we have to drive these brands to some meaningful contribution or we have to question whether or not they should go forward as individual brands.

And we are, as a management team, perfectly prepared to do that and we'll do that as each situation evolves.

What was the second part of the question?

Oh, the marketing expense.

Again, the reality on the ground in the economy right now says that if you're going to spend $5 million in marketing, it had better turn product at retail.

And if we can create opportunities for our retailer to be successful with a brand, we'll put that money to work.

If we can't, we'll keep it in our pocket.

If all the consumer wants to do right now is shop low price, then we are better off just pocketing the money because our brands are not low-priced brands.

But in the end I think consumers, especially at the retail specialty level, still want unique brands and quality materials and quality product.

So we are working to really continue to drive that in the marketplace.

(Operator instructions) Christopher Svezia, Susquehanna.

This is [Christina] for Chris.

My first question is, for your UK business, that's accounting for the lion's share of your international business.

What is the potential for that business, should you decide to take over your distributors?

And how long would it take for you to accelerate growth in that business?

It would be helpful to get an idea, too, as to the number of SKU counts that you would be able to expand it to compared to, say, your US wholesale or your own retail stores.

Well, the UK business has been evolving very, very nicely in the last few years.

As with most of our international distribution, for UGG especially, it started as our core assortment of what we call classic product here in the US.

The acceleration to a broader spread and assortment has been much, much faster than it has been in the United States.

And, from day one, we have not allowed that business to evolve into simply a classic business.

That business now, if you go into our stores, particularly in Covent Garden and in the Westfield Mall, you will see the same assortment of product that you will see in the United States.

And we are driving the wholesale distribution to the same thing.

The shop-in-shop in Harrods has a tremendous assortment of product beyond the classic product.

They have all the spring product that we've had, and they have the diversification of fall product.

You will see that as that product goes out on display.

So we anticipate from a SKU point of view that the market in the UK and in other world markets will more or less reflect the product that you see in the United States.

But would that mean, say, going from 50 SKUs to another 50 SKUs if you decide to take over that distributorship, would it be something (multiple speakers) --?

Well, that's happening independent of whether we take over the distributorship or not.

That's happening as (multiple speakers) --

But, if you do decide to take over, could it actually benefit in terms of assortment?

And, is that magnitude possibly something like twice what they are currently carrying?

As I say, the distributors currently carry the majority of product that you are seeing in the United States.

So this is not about taking over a distributor, for example, and converting to a subsidiary and then ramping up a number of SKUs.

That's not good brand building because the brand evolves at its -- the appropriate rate around the world, and you have to showcase, spread an assortment worldwide, one consistent brand image worldwide.

So our distributors have been reporting a very good spread and assortment of product across the board with UGG.

Jim Duffy, Thomas Wiesel Partners.

This is actually [Christian] in for Jim.

I was wondering if you could talk a little bit about the composition of inventory.

Are there any areas where you're seeing problems, that you need to move through some inventory, particularly with UGG?

No; on the contrary, our UGG inventory is all -- you know, for in-line product.

And as we said, most of it is for pre-booked orders.

And we are very pleased with the status of the inventory also for Teva and Simple as it's significantly down.

We are really buying closer to the market and keeping a very clean inventory.

So we are very confident with our inventory position.

I guess I was wondering if I could get a little more explanation of why the inventory build in UGG, in the face of what looks to be some signs of slowing in that business; what's the motivation there for the early take-in of shipments?

Well, the main thing is, as we've indicated, is we brought product for the need for Q3, some of it also for Q4.

Some items, for example, because of minimum orders from the factories you cannot split the orders over a couple of shipments; you have to take them all at once.

And the main point also is to accommodating our factories, to help them with the capacity.

As the numbers are growing, the capacity of the factory is being constrained by that.

So we have been bringing inventory earlier in order to help them with the capacity.

Okay, that's helpful.

And then, I'm wondering if you can provide some more perspective into the dynamics in the domestic wholesale business?

Across the board, all brands?

For the UGG brand, primarily.

Our domestic wholesale business remains quite strong.

We are very, very important to our retailers.

It's a significant partnership and relationship across the board.

The UGG brand pays a lot of bills for our retailers.

We sell product at, generally, full margin at a high ASP.

So it is one of those brands that comes along in every generation, if you will, in footwear that achieves that level of significance.

And it's very important for a retailer to have this brand, particularly in the fall season, in order to make their year.

(Operator instructions) Howard Tubin, RBC Capital Markets.

Is there any way you can give us any color on how the Nordstrom anniversary sale is working out so far for you guys?

Well, indications are strong.

We've had excellent sell-through on key items and a lot of key items at full price, by the way.

One of the great things about the Nordstrom anniversary sale is they also sell a lot of product at full price, products that they have received a little bit early.

So we are getting a good read, and that's what we always look for with the Nordstrom anniversary event, is to get a read of the upcoming season.

And we are feeling very good about what we are seeing.

That's great.

And maybe just one question on your thoughts around the share repurchase, now that you have an authorization out there.

How aggressive do you plan on being with that?

Well, the share plan is subject to the same insider policy that we have within the Company, so we have not been able to take advantage of that since we are in a quiet period.

We will buy back shares as we find it appropriately, based on the share price and our cash needs.

Todd Slater, Lazard Capital.

I see the usual negative after-hours activity, and I just have to say, you guys have done a really good job in a very tough environment, and there are very few companies that I follow that have the track record you guys have continued to put up.

Thank you, Todd.

I was just trying to get my arms around a little bit the conservative nature of the retail assumptions you're making in the fourth quarter, which are obviously impacting your guidance.

And you have this, I guess, about a 5% increase baked into your back-half guidance for UGG.

I'm just curious, what level of backdoor or reorders are you assuming in this guidance compared to last year?

I'm just wondering, is it down versus last year?

Are you being very conservative?

Does it represent or reflect what you're seeing in the velocity of that business currently?

Because it sounds like you are getting some terrific uptake, not just on the anniversary sale items but on some of the full-priced product around it.

I'm just curious about what assumptions you are making on that reorder business versus [LY].

Well, Todd, as I mentioned, we are assuming a similar level of the minor cancellation levels that we had last year.

We're still being conservative vis-a-vis the pre-book.

One area that we also take a cautious look at is our e-commerce business.

As you know, it has been down in the second quarter.

And right now it looks like, in our assumption, it's going to be down for the full year.

So it depends how consumers buy and it depends how much they buy from our consumer direct business.

That will impact our numbers.

By the same token, we are also anticipating a better December than we had last year, given the wheels falling off the cart on the economy at the beginning of December, certainly from a retail perspective.

So I don't anticipate that happening this year.

I think most of the bad news is out, and consumers are over some of that shell-shock.

So we should see a smoother level of reorder compared to what happened last year, where everything just kind of fell off the table at the beginning of the month.

So if you take all that into consideration, July through January, I'm still -- it's not clear to me.

Are you expecting the dollar level to be down at this moment, or at least guiding to that type of expectation in the hopes that you at least hit that, if not exceed it?

Or can you give us a sense?

Because I couldn't tell whether you were saying flat year-over-year or up or down, in terms of expectation for the full period.

For the back half of the year, we're looking at UGG to be about 5% up.

Right, but that's two pieces of business.

The original is ship it, sell-in and then reorder; right?

So I'm wondering if you can isolate the reorder part, or is that 5% is what you are anticipating on the refill?

Well, you know, we are not breaking that.

Can you just say whether it's up or down on the refill, how conservative you are being on that?

I think we are anticipating it to be flat to a little bit up.

I think that's the only rational approach to take at this point, given what we don't know about the consumer's attitude for holiday shopping.

Okay, that's helpful, now I understand.

Lastly, could you just talk about the currency of the inventory this year versus last year?

It's very current inventory, it's very clean inventory.

We have -- I think the mix is great.

A lot of new products that we are getting a good read on early in the season that we should be in good shape on as we move through the season.

The Bailey Button is one that's performing very well.

We hope to be in a good inventory position on that.

So, again, trying to create excitement at retail through new product has been what we have been building this brand on, and we hope to continue that.

So it's important to have a diverse mix as you move into the season.

Great.

Well, I hope your guidance is conservative as it has always been, and best of luck.

(Operator instructions) Omar Saad, Credit Suisse.

On the marketing strategy and the shift in dollars and what you discussed about doing more point-of-sale marketing, as opposed to external traditional media marketing, can you talk to me about your strategy to market the UGG brand?

If retailers are having trouble driving traffic to the stores, is doing point-of-sale the right decision?

How do you make the balance of those two options in terms of where you are going to allocate those precious dollars?

Well, first of all, the shop-in-shops are a form of marketing and the spread in assortment and the investment we've made in those locations have been paying pretty good dividends.

So we'll continue to drive that and develop that.

We also have been selling our product online to consumers for very many years and doing it quite successfully, as you know.

So we will continue to develop our online marketing capabilities through the very extensive list we have of UGG customers who have bought product online.

And that's a tactic right there where you can drive consumers to a local retailer or have them buy directly from the brand.

We've always erred towards the side of getting traffic at retail because it's at retail that people see the full spread and assortment of product.

We're also working with our customers to exploit opportunities using their own list and their own direct-to-consumer marketing.

For example, at Nordstrom.com, you may have noticed this past week we were the lead page for one of the days there.

So we've tried to replicate that across our distribution channel and really keep UGG and the new product top of mind with consumers.

We feel that, given the core of customers we have in the market, if there is excitement and buzz about our new product, that that's enough to get consumers in the door to at least look at it.

And once they're there, our retailers are pretty successful at closing the sale with either the new product or some classic items or slippers or a variety of other things we are doing.

Got it, that's helpful; and then, one follow-up question on a different topic.

You mentioned some of the -- earlier in the prepared remarks, you mentioned some of the bankruptcies that have happened at retail, and we kind of know all the dislocation that's happened as a result of this economic environment that we are in.

Given what has happened more recently with CIT and some of the financings out there, can you give us an update on the liquidity situation with some of your smaller retail customers that you deal with and how you've been helping them, or if you've needed to help them at all in terms of working capital, and how you feel about that mix from that perspective?

Well, overall we have seen some deterioration in the credit quality of some of our retailers.

Luckily, we have long-term relationships with relatively strong retailers, if it be department stores or the independent stores.

So, even though our bad debt expense has increased some, I would say it's not as much as relation to the economy.

We do use our balance sheet to help our retailers when it's appropriate by providing them dating, but also keeping an eye on their credit risk.

So it sounds like you are still pretty comfortable with how do you stand from --

We are very, very comfortable, yes.

Very good, thanks a lot, good luck.

That is all the time we have for questions today.

I would like to turn the conference back over to our speakers for closing remarks.

Well, thank you all for participating today.

We continue to progress toward our strategic vision for this Company, despite the difficult environment we find ourselves in.

I'd like to really express my gratitude to our team worldwide.

It's a very tough year, very difficult year, a lot of people working very hard and we continue to drive results for our shareholders.

So thank you very much.

And that concludes today's conference.

We thank you all for joining us.