Deckers Outdoor Corp (DECK) 2009 Q3 法說會逐字稿

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

Welcome to the Deckers Outdoor Corporation third quarter fiscal 2009 earnings conference call.

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

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

Instructions will be provided at that time for you to queue up your questions.

(Operator Instructions) I would like to remind everyone that this conference call is being recorded.

Before we begin, I would 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 security 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 consumers 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 call over to the President, Chairman, and Chief Executive Officer, Angel Martinez, please go ahead sir.

Well thank you operator, and welcome to everyone joining us on the call today, and listening via the web.

With me are Zohar Ziv, our Chief Operating Officer, and Tom George, our recently appointed Chief Financial Officer.

Today after the close of the market, we reported very solid third quarter results, highlighted by sales and earnings growth that exceeded expectations.

This earnings release can be found on our website at deckers.com.

In addition to our better than expected financial performance, there were several operational highlights that gave us confidence that the strategies we're implementing to evolve the product lines, broaden our growth opportunities, and expand the market positions for all our brands, are succeeding.

Sales for the quarter rose approximately $31 million or 16%, to $228.4 million, compared to the third quarter of 2008.

This was slightly ahead of previous guidance, due to higher demand for the fall UGG line.

At the same time, diluted earnings per share for the quarter rose 32% to $2.59 versus $1.97 a year ago, above our guidance.

For the third quarter diluted EPS is up approximately 10% over last year.

The earnings upside was driven by the higher sales, as well as roughly $5 million less in operating expense, versus our guidance; roughly $3 million of permanent realized savings and the remaining of $2 million of marketing programs that we postponed until the fourth quarter.

The UGG brand's fall retail sales were led by our new Bailey Button boot in our Classic Collection.

At the same time we're experiencing strong sell through for our core classic product, our entire knit collection, our fashion collection and our cold weather and casual collections.

New styles, such as the classic Argyle, the Abbey, and the Haiku, are helping drive our third quarter retail performance as well.

Over the last several seasons we have continually developed new and compelling styles that diversify our merchandise assortments, in an effort to attract new consumers to the brand, as well as to create repeat purchase from existing customers.

I think a good example of our success is the Knit Collection, first launched back in 2006, the crochet boot has since evolved into a collection of styles that are performing very well, led by the Cardy, which was introduced in 2007, and newer versions featured for the first time this year, like the classic argyle and the striped cable knit.

Based on response to several of our new introductions, we believe there are meaningful market share opportunities to the UGG brand, and we are confident that we can continue to develop new growth vehicles to complement our core business.

Domestically in the last four weeks the brand has come on very strong at retail.

The movement of the calendar in the fall, along with cooler weather, has motivated the consumer.

Currently the most explosive business is in the mid-Atlantic, Tri-State New England area, and in the Midwest.

We're seeing strong increases in the Pacific Northwest, the Rocky Mountains, and are hearing good reports from the south as well.

We've seen sales pick up in southern and northern California.

In the southwest we are seeing relatively flat business to last year, with some customers reporting moderate gains.

Now based on past seasons this area is typically the last to report strong sales increases.

Lastly our business in Hawaii is exceptionally strong.

In addition to our great opening of our newest flagship store in Waikiki, other major customers with business in Hawaii are reporting big increases in sales compared to last year.

Internationally the UGG brand has big opportunities for growth.

We're seeing solid growth in our foreign markets, led by the UK, Benelux, and Canada.

The reaction to a much broader fall assortment has been very positive, and the brand's performance overseas is somewhat reminiscent to what we experienced with the UGG brand in the US a few years ago.

Success we're having this fall is providing important momentum for the brand as we head into the holiday season, as well as next year when we will be introducing the Spring collection in several countries.

With regard to our transition to a direct subsidiary in Japan, that process is going smoothly.

Japan has long been a strong market for luxury brands, and we're confident that under our direct control we can significantly expand the brand's penetration and increase sales volume.

As we discussed on our last call, after an extensive remodel we reopened the UGG store in Tokyo that had been owned by the brand's former distributor.

The store has done very well since we took it over, which we believe is a good indicator of the opportunities that exist with the brand under our direction.

2009 marked the second year of the Teva fall line.

And for this season we've made a number of adjustments to the collection, and presented a much tighter line compared with a year ago.

This fall we featured a greater number of technical products, including a collection of light hikers, led by the Riva for men, and the Dalea for women, that have sold through very well and have become our most successful closed toe shoes to date.

The performance of these styles, particularly given the $130 and above price point, indicates the consumers' acceptance of Teva as more than just a sandal brand, and is proof that there is a closed toe fall business for Teva.

Light hikers and multi-sport footwear is a very large year round category, and a big opportunity for Teva, so we're encouraged by our recent performance and are excited about the positive response to the expanded line for spring, 2010.

Now with a shift to more technical products, and less emphasis on rugged casuals, we did not have the lower price point to drive volume this fall, which is reflected in our top line results.

However, while our sell in was down versus a year ago, sell through with key accounts like REI and EMS was much better.

We're optimistic that by first establishing Teva in the upper tier, or best category, we will be more successful in penetrating the broader market next year when we have a more complete line, with a wider variety of styles and price points.

As we anticipated, Simple sales were below last year for the third quarter, primarily due to the launch of planet walkers in 2008.

The brand also continues to be impacted by the challenging retail environment, and buyers' reluctance to place any significant future orders.

However, our retail sell through has been very, very positive, led by ecoSNEAKS at Nordstrom and Journeys, our two top customers.

In addition, we witnessed meaningful increases in our e-commerce business, and the brand continues to perform well on the Internet sites, on other Internet sites such as Zappos.com.

During the third quarter we previewed Simple's newest collection, Bio-D, with our national account base.

The reaction to this line of biodegradable mid soles and out soles in our sneakers and flip-flops has been excellent.

We're excited about the potential of these new products and the compelling message.

Our Bio-D collection uses a new product called EcoPure that reduces the time it takes for rubber and plastic soles to decompose, down to roughly 20 years from 1,000 years.

Bio-D collection is a great complement to the ecoSNEAKS, and should further strength the Simple brand's position as a leader in sustainable footwear.

Now onto our other brands.

While it continues to be a challenging sales environment for our smaller brands, there have been some strategic highlights worth noting.

First was the Ahnu brand.

We've seen a significant improvement in product quality, namely consistency and fit, since we transitioned their sourcing and manufacturing to our platform earlier this year.

This improvement hasn't gone unnoticed by retailers, and has led to improved business as key accounts like REI and Eddie Bauer.

It has also provided new distribution opportunities, including a 40 door test will Dillard's this spring, and the inclusion of a handful of styles in the Harrington Catalog for the holiday season, which goes to approximately 19 million households, and features many of the top brands that cater to a variety of consumer activities.

Now they're known in the industry for only carrying superior quality items, so not only is this a great sales opportunity and exposure opportunity for the Ahnu brand, it's also a real testament to the operational challenges and changes that we have implemented in a few short months.

TSUBO is a brand in transition, and we are not where we had hoped to be at this point.

As a result, we've made adjustments to the product line and have restructured the sales force, which should begin to yield positive benefits starting next year.

For 2010 the product lines are much more focused, we have consolidated the collections, and are putting more resources behind a few key items.

The new lines also carry more accessible opening price points compared to this year.

Our restructured sales force is already delivering wins.

We have commitments from Nordstrom in southern California and the northeast for the Spring, after having no sales to them in 2009.

We're also making inroads with numerous influential retailers across the country, such as Show Biz in San Francisco, Hannig's in Chicago, The Tannery in Boston, and Benjamin [Luboke] in Philadelphia.

These retailers are relaunching the TSUBO brand after having been dormant in quite some time.

As we think about next year, our primary focus for both Ahnu and TSUBO brand will be on evolving and refining the merchandise assortment, and selectively building the right distribution for the long term.

I'll now turn the call over to Tom to review the financials.

Thanks Angel.

For the third quarter of 2009 net sales increased 15.8% to $228.4 million, up from $197.3 million for the third quarter of last year.

Including sales from the wholesale division as well as the consumer direct business, our net sales of UGG products increased 19.1% to $202.8 million, up from $178.7 million for the third quarter of last year.

Net sales of Teva products decreased to 19.5% to $9 million in the third quarter compared to $11.2 million in the same period of 2008.

In Simple brands, net sales decreased 31.4% to $3.5 million for the quarter versus $5.2 million in the same period last year.

Combined net sales for the companies other brands, which were acquired in 2008 and 2009 were $3.1 million for the third quarter of 2009.

Included in these numbers are global retail sales for all brands of $12.3 million, up 128.3% from $5.4 million in the third quarter of 2008, driven by two new stores and a same store sales increase of 31.1%.

Sales for our e-commerce business, which were included in the brand sales numbers as well, decreased 21.2% to $8.4 million for the third quarter, compared to $10.6 million for the same period a year ago.

The decrease in e-commerce sales resulted from more second quarter back orders carried into, and shipped in, the third quarter of '08 than 2009 for the UGG brand, and a decline in our conversion rates for all brands.

All told, including the brands sales numbers, domestic sales for all brands increased 10.3% to $179 million compared to $162.3 million in the third quarter of last year, and international sales increased 41.1% to $49.4 million compared to $35 million in 2008.

International sales were 21.6% of total sales in the third quarter.

Our gross margin for the current quarter was 42.9% compared to 43.3% in the third quarter of last year, and this decline was primarily due to lower margins in the Teva, Simple, and TSUBO brands compared to the prior year due to higher markdown and closeouts, due to the difficult retail environment.

Total SG&A expenses for the quarter were $44.9 million or 19.6% of net sales, compared to $42.3 million or 21.4% 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 eight new retail stores that were not open in the third quarter of last year.

The lower SG&A expense versus our guidance from $5 million was composed of $3 million of permanent savings and $2 million of expenses postponed until the fourth quarter.

Approximately half of the permanent savings were due to lower than expected sales and marketing expenses and the remainder was the result of more efficient global distribution and lower warehousing cost and lower than expected G&A expenses, including favorable settlements from our intellectual property enforcement efforts.

The $2 million of postponed expenses consists of mostly selling and marketing expenses to support our significant Q4 sales season.

Operating income was $53.1 million, or 23.2% sales, compared to $43.1 million or 21.8% of sales last year.

The improved operating margin was mainly attributable to sales growth, driving improved leverage on operating expenses.

Interest income was approximately $0.1 million in the third quarter, compared to last year's third quarter interest income of $0.5 million.

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

Our effective tax rate for the year is now expected to be 37%, down from our previous estimate of 38% as the result of an increased mix of international sales and profits that are taxed at lower rates.

The year-to-date nine months change resulting from the revised effective tax rate resulted in a tax rate for the third quarter to be only 36.5%.

Net income and diluted earnings per share for the third quarter of 2009 increased 30% and 31.5% respectively over the third quarter of '08.

For 2009, net income was $33.8 million, or $2.59 per diluted share, compared to $26 million or $1.97 per diluted share in the third quarter of last year.

Now turning to the balance sheet, at the end of the quarter, our overall inventories increased 18.9% to $187.8 million, versus $157.9 million a year ago.

By division, UGG inventory increased a little bit over 30% to $174.9 million; Teva inventory decreased 55.6% to $7 million and Simple inventory decreased 40.9% o $3.5 million while the other brands inventories made up $0.4 million of the net increase.

The increase in UGG inventory supports the increase in holiday orders currently on our order books for shipment in the fourth quarter.

In addition, expansion of our global retail division contributed approximately $9 million to the total increase.

We feel very comfortable with our current inventory levels as we head into our largest sales quarter.

In addition, at September 30th, we had cash, cash equivalents totaling $125.6 million, compared to $67.9 million a year ago.

In accounts receivable, we're $112.9 million, relatively flat to $113 million a year ago.

During the third quarter of '09, we repurchased approximately 300,000 shares of our stock for a total purchase price of $20 million, under the $50 million stock repurchase program our Board authorized in June of this year.

Now, with regard to our outlook, based upon the UGG brand's third quarter performance, coupled with increased visibility into the fourth quarter, we are raising our full-year revenue outlook.

We now expect our full-year revenue to increase approximately 13% over 2008, up from our previous guidance of approximately 9% to 10%.

We now expect UGG brand sales to increase approximately 17%, up from our previous expectation of approximately $12% to 13%.

For the Teva brand, we still expect sales to be down around 11% and we now expect Simple brand sales to decrease approximately 19%, down from our previous guidance of approximately 5% to 8%.

In other brand sales, it should be approximately $8 million to $10 million.

Now to earnings, for the full-year, we now expect our non-GAAP diluted earnings per share, which excludes non-cash write downs of intangible assets as detailed in our current earnings release, to increase approximately 9% over the $7.27 non-GAAP diluted earnings per share in 2008, which included the non-cash write downs of intangible assets as discussed in our fiscal year 2008 earnings release.

This is up from our previous expectation to remain flat to slightly up.

This guidance is based on an anticipated diluted share count of approximately 13.1 million shares.

Our guidance also assumes a gross profit margin of approximately 44.3% in 2009 flat to the 44.3% in 2008 and SG&A, as a percentage of sales, of approximately 23.4%, down from the prior guidance of 24.5%.

For the fourth quarter, we now expect revenue to increase approximately 4% in non-GAAP diluted in earnings per share, which excludes non-cash write downs of intangible assets to increase approximately 5% compared to the non-GAAP diluted earnings per share for the fourth quarter of 2008, which excluded the non-cash write downs of intangible assets discussed in our fiscal year '08 earnings release.

This compares to our previous guidance for sales to decrease slightly and non-GAAP diluted EPS to decrease approximately 4%.

The guidance is based on an anticipated weighted average outstanding share count of approximately 13 million for Q4.

Our guidance also assumes a gross profit margin of approximately 47%, down slightly from the previous guidance of 47.5% while guidance for SG&A as a percentage of sales is approximately 19.3%, also down slightly from the prior guidance.

The total year and fourth quarter guidance assumes a revised effective tax rate of 37%.

Now, I'll turn the call back to Angel for some closing remarks.

Well thanks, Tom.

Well we're very pleased with our third quarter and nine-month results in light of the number of challenges facing our industry and the economy as a whole.

I'm very proud of our ability to continually execute at a very high level.

Additionally, I'd like to congratulate Connie Rishwain and the rest of the UGG team for achieving the highest Q3 sales in the brand's history, an exceptional effort and great job.

As Tom just mentioned, we are raising our fourth quarter guidance.

This is being driven by strong retail sell throughs and the lower than forecasted cancellation rate.

We're especially pleased with the demonstration of commitment to our brands by consumers during these times of more discriminating spending.

As usual, we won't be commenting on 2010 specifically until we complete our budgeting and forecasting processes and report our year-end results in February.

We are, however, encouraged by our prospects for Spring, based on orders to date, particularly in the knit products, the Flair flip flop, our slippers and cold weather products, especially early in the quarter, in the first quarter.

With Teva, we're building on the success of our light hikers this fall to expand the brand's penetration of the outdoor footwear category while infusing the line with more compelling open toe styles to capitalize on our market share gains we made this year.

We're seeing increased commitments throughout our account base, including outdoor specialty stores like REI and EMS; sporting goods retailers like Dick's and TSA, department stores such as Dillards and Nordstrom and new distribution with Von Maur and various regional independents.

As I mentioned earlier, Spring will feature the debut of Bio-D, the Simple brand's newest collection as well as updated styles from Eco-SNEAKS and Green Toe.

On the distribution front, we're adding additional doors with Nordstrom and Journeys while at the same time increasing our shelf space with these accounts.

And with regard to our own retail stores, we opened an outlet store in Palm Springs and an UGG Australia concept store in Manchester, England during the month of September.

And last week, we opened another concept store in Honolulu.

By the end of the year, we plan to open an outlet store in the UK as well.

Our initial plans for retail next year include further expansion in Asia.

In 2010, we will continue our international wholesale expansion as we move toward our goal of having 30% of total sales come from outside the US by 2012.

On top of opening new markets for UGG, for Teva and the Simple brand, next year we'll be taking over the Teva Benelux business as part of our long-term strategy of transitioning to subsidiary direct sales models in selected markets.

We intend to advance our international distribution strategy when it makes sense for the Company to sell directly to our wholesale accounts in certain markets.

Obviously, there are additional expenses and delayed revenue recognition associated with the transition to direct models, direct sales models.

But the long-term sales and gross margin benefits of going direct should far outweigh those short-term impacts and provide us a significant earning power in the years ahead.

And we'll discuss this further when we report our year-end results in February.

As I think about the future, I'm very excited about what lies ahead for our Company.

The products are evolving and continuing to get better.

We're becoming more and more important to our retail partners as consumers seek out our brands and our team is doing a great job at developing the infrastructure in managing the cost side of the business.

Everyone here is committed to building on our current momentum and fully capitalizing on the many global opportunities that exist, going forward.

Operator, we're now ready to take questions.

(OPERATOR INSTRUCTIONS)

Our first question is from Mitch Kummetz of Robert W.

Baird.

Please proceed with your question.

Thanks and congratulations, guys, on a great quarter.

Thank you, Mitch.

A few questions; Angel, could you just kind of generally comment on, you know, are retailers under inventory in UGG right now, are they chasing?

And, you know, to what extent can you accommodate them in the chase, assuming that they are?

And do you have much open stock inventory or any real ability at this point to kind of chase production on your end, in order to maybe get them more product before year-end?

Well, it's funny because I was having a conversation with someone earlier and I had to remind them that Q3 ended on September 30th.

In the time since September 30th, our indications are that there's been some pretty significant activity at retail, which has, perhaps, altered the curve a little bit.

So, we're seeing a lot of excitement over our products.

We're in a position to chase pretty aggressively.

And we will, obviously, do everything we possibly can.

I suspect that there are quite a few retailers who, perhaps a little earlier in the year, cancelled some orders that they wish they hadn't cancelled.

And those products are sold.

So, we're scrambling as well.

I'm feeling pretty bullish about it.

Okay and then you made a couple comments in your remarks.

One, you talked about introducing, I think you said Spring, UGG to several countries next year.

Could you elaborate on that?

Well, Greece, for example; those are smaller countries where the brand really is just kicking off.

There are some countries, for example, Germany, which have been evolving the product line over the last several seasons.

That's a fairly new distributor.

And, as these distributors build their models, you know, they build it all on core product.

So, they have been very delicate in how much of the line they could afford to bring in.

So, across the board, we've had great responses to the Spring line.

And we're going to begin to see the impact of the expanded product line across most of the international markets.

Okay.

And then you made some favorable comments about the reception to Spring across UGG, Teva and Simple.

I mean, are you prepared to say whether or not your Spring orders are up in those brands compared to last year?

Well we really don't talk about that yet, but I will say that we've had some very strong reception to the knits, the Cardy, the Argyle, the striped knit on the outside.

The Bailey Button has been in colors for spring and has been very strong.

We've got a sneaker collection for women in the UGG brand that's been very well received.

On the Teva side, there is closed footwear now for spring that we didn't have in previous seasons, we've also got a couple of new ideas up our sleeve in the sandal world.

And Bio-D is something that we got a great response to, and we're pretty excited about that coming in the spring.

So I have to say that I'm feeling very positive about the reception this spring.

I haven't seen a reception across the board to our spring collection like this since I've been here, but it feels good.

Okay.

And then lastly, you mentioned in your closing remarks that you're taking over distribution into Benelux, I think you said for Teva.

Could you elaborate on how you expect that to transpire?

How are you setting up your own operations, I mean what's the timing of that?

Mitch, this is Zohar, I'll take that one.

As we indicated, we are going to take over the distribution at the beginning of 2010.

Initially the transition is going to be that we are working with the distributor to accommodate the transition, and over the next year we'll be building up and transitioned infrastructure into the Deckers Europe operations.

We have been, over the last year or so, building a team in Europe.

Deckers Europe exists currently, it's a robust operation.

We've got a great talent pool there and so I think it will be a very smooth transition to our own organization.

It's not only this distributor but others potentially transition as well.

Okay, all right.

Thanks a lot, I may jump back in the queue with a question for Tom a little later.

Thanks again.

Thank you.

Our next question is from Todd Slater of Lazard Capital Markets, please proceed with your question.

Thank you, and kudos on another great quarter.

Thanks Todd.

Last quarter you said that your fourth quarter UGG plan conservatively assumed no increase in re-orders compared to last years pretty depressed levels.

So I'm wondering if you can tell us how your re-order or your chase assumptions have changed?

You said just now that you're scrambling and you're optimistic.

How has that changed, and what's assumed in your new upwardly revised fourth quarter revenue guidance?

Well as we said before, we were anticipating cancellations in the third and fourth quarter.

We haven't seen cancellations.

The people who did cancel early, maybe in the second quarter, as I said earlier they kind of were looking to get those products back in the Q.

So that's a big factor right there, because we were being pretty conservative and assuming the worst, and hoping for the best.

But obviously the situation has far improved from that.

So usually you have some product staged or you said that all of your inventory is spoken for, or most of it.

How much is left for re-order?

How much of your increase in your fourth quarter assumptions is driven by some, is it all driven by less cancellations than you had assumed, or [inaudible] reorder?

Well you know for a fact that we don't have access to any more production for the year.

So at this time of the year it's always a bit of a crap shoot in terms of how much inventory do we back up, particularly around core product, particularly around classics, for example, and other core items in the UGG line.

This year we've done that, and we've taken our best guess, and at some point we're going to run out of product.

I hope that it continues to be, that the demand continues to be as strong as it is.

I think that probably in this year, 2009, not a bad situation to have run out of product.

That's something that a lot of folks would love to have happen in other businesses.

I think we've got, as best as we can sort of plan, a pretty good mix of product available in the core assortments for fill in.

But again, if the trends continue, we could have holes.

Okay and just lastly, and then I'll let others get on.

Your increase in the earnings guidance for 4Q looks primarily driven by revenue and by expense leverage improvements.

Your gross margin piece was down 50 basis points from before.

Obviously international continues to grow in mix, and that's probably a lower margin business.

But what else, if anything, should we read into that, the gross margin piece?

This is Tom.

The gross margin piece there, looking at our revised internal projections, we did take down slightly the e-commerce business relative to the total mix of business.

But you know, given the current trends at retail and some of our current trends with our e-commerce and our retail business, that may prove to be a little bit too conservative when all the dust settles.

So the gross margin down by about 50 basis points, that might prove to be an area that there could be some up side to that.

Okay and the stores with a 31% comp, that's obviously a positive gross margin driver.

Yes, absolutely.

And that should be a bigger contributor in the fourth quarter I would assume.

Good assumption.

Okay.

All right well great, thanks very much, and all the best.

Our next question comes from Stephanie Wissink of Piper Jaffray, please proceed with your question.

Hi, thank you very much.

I just have a couple, and then a couple of follow up and clarification questions.

The first, gentlemen, is just your level of visibility and your comfort level into the reorder potential.

I think both Mitch and Todd have asked about your inventory plans.

I'm trying to get a sense of your visibility into the potential reorders.

Are you getting a sense already at this point that there could be some coming in the next several weeks?

And the second question relates directly to your international percentage of sales.

You've given us a goal of 30%, but when I look at your year-to-date figures it's almost near that point.

So is 30% a fat point, or is there willingness to extend beyond that percentage?

And if so what would be the key markets of opportunity for that?

Thanks.

Okay.

Reorders, right now I'll just say this, we are scrambling to fill customers needs, and the warehouse is very, very busy.

And we're doing the very best we can to fill what we possibly can with the demand that we have.

So that's really all I can say there.

It's a crazy time right now.

As far as the international business at 30%, that's not a stop point.

There are big opportunities in markets like the UK, but we really feel that the brand is still very underdeveloped.

And then Japan, you know Japan is a market that, just judging from the response that we have in Honolulu to our product, not only in the store we just opened, but in other retailers, a large percentage of those consumers are Japanese tourists.

We know from our store in Tokyo that the demand is much greater than we've been anticipating in the last few years in the previous relationship that we had.

So there's strong up side in Japan.

Those two markets alone, particularly as strong footwear markets as they are, and in the case of Japan as a luxury market as well, real significant up side opportunity.

We've just got to make sure that our organization is prepared to manage the brand appropriately manage distribution appropriately, and continue the consistency that we've had so far in rolling the brand out around the world.

But we're very bullish in these opportunities.

Okay I have just one clarification on your comments regarding scrambling for the reorders.

Would you qualify your reorder levels at this point in the season to be higher than what they were last year?

Or is that an effect of just having a lower inventory balance overall?

Well last year was strange.

Last year we had -- the wheels fell off on December 1, or right after Thanksgiving.

The current rate is probably stronger than that.

There's probably more confidence from the retailer about our brand.

So it's a very strong indicator as far as I'm concerned.

And like I said, we're scrambling.

Okay last one for us, which is related to your e-commerce business, and can you give us a sense of that additional $9 million of inventory I think you allocated toward your direct retail.

If you could just help clarify some of those shifts last year, and then the increase in inventory related to the stores.

Thanks guys.

I think we pointed out on the call with the increase in our stores, I think we're up eight stores this year compared to the prior year.

So as a result of that you have to invest in inventory to open a store so that we have about $9 million of additional retail inventory globally now related to opening stores around the world.

Okay on the e-commerce?

Can you just talk a little bit about conversion, any initiatives there to improve conversion rates?

Our e-commerce business has been down compared to the prior year, which by the way, we have seen similar trends in our other e-commerce sites who are carrying the UGG brand.

But what we have seen in the last couple of weeks, we've really seen a turnaround, and that's what Tom was alluding to when he was talking about the margin.

We've really seen improvement and if that trend will continue there will be some up side potential, both on the top line and the gross profit margin for the business.

Okay, thanks.

Good luck gentlemen.

Thank you.

Our next question comes from Sam Poser of Sterne Agee, please proceed with your question.

Good afternoon.

I just want to clarify something on your guidance versus your inventory levels, Tom or Angel.

For the last few -- a lot of people are -- and I've already been getting calls that people are concerned that your inventory look [inaudible].

I personally have not, however, guidance versus your inventory level still looks fairly light, especially given that you're chasing the business.

And over the last few years you have virtually sold everything you've, all the inventory you've had.

If you take cost of goods as a clean number, so it's a comparison, you've basically liquidated all the inventory you've had leading in, Q3 inventory into Q4.

But right now, which would leave tremendous up side, especially given, as you put it, the wheels falling off at the beginning of December last year.

So I mean with chasing it, given the UGG inventory level, how much of that inventory is spring versus fall, and how much opportunity is there on top of that, given the 30% increase in the UGG inventory.

Sam this is Tom.

Let me address the inventory first.

I think going through the inventory, as Angel mentioned, we're in a really good inventory position in terms of what product we have available, its divesture, moving the product.

You know you don't sell inventory down to zero, you always have to have a certain amount of inventory on hand, especially when you have a retail initiative, you have to have retail in stores as well.

So you never sell down the inventory to zero.

So we've got appropriate inventory levels and the sufficient inventory to support our current forecasts.

Okay but I mean last year you had [$137] million going into the quarter, you did $166 million in cost of goods sold.

So you've got $180 million going in right now, $190 million almost, I mean should we be looking at sales up at that cost of goods range, as based on the history?

Which has happened, I mean literally the last four years.

Sam another moving part here is we do have some receipts of additional product coming in the fourth quarter.

Oh of course, I'm not saying you're going to end at zero, you'll probably end at around $80 million or something like that.

But I mean the figures -- this is the quarter where if you're chasing right now it just seems like the guidance is fairly conservative.

Could we go there?

Sam as we indicated, there are up side potentials.

When we gave guidance last quarter we were conservative with regard to the cancellations.

As the quarter has proceeded and we are not seeing any cancellations, right now in our guidance there are no assumptions as to cancellations.

What you do have a little bit of in our assumptions, we still have credit issues, we have customers that want the product but they're on credit hold with us, just because of credit concerns.

Additionally you have our consumer direct business which is both a combination of e-commerce and our retail stores, that as we indicated when we did the projection, our e-commerce business was down.

So if the trend of e-commerce will continue as we're seeing the last few weeks, and the trend in the store, you will have an up side potential and we will have the inventory to support it.

Okay and then two other questions.

Number one, could you give us the break up by group of wholesale/retail e-commerce by division for [inaudible].

We're not going to do it until we release the Q.

Okay well thank you very much.

Thanks Sam.

Our next question is from Howard Tubin of RBC Capital Markets, please proceed with your question.

...Spring is moderating nicely over the last three quarters and so now you're up, you're up 19%.

(inaudible) a trend you think will--?

Howard, excuse me; we didn't hear the first part of your question.

Oh sorry; can you hear me?

Yes, now we can hear you.

Oh sorry; yes.

The trend in inventory has -- the growth rate in inventory over the last three quarters has moderated, right?

And so now you're up 19%.

Is that a trend we can expect to continue?

At the end of the fourth quarter, should we expect total inventory to be up less than 19% at the end of the year?

I think you will see the trend continue, as the percentage increases lower, as we have in prior years, quarter-over-quarter.

Okay, thanks.

And then just one question on the Shop-n-Shops.

Angel, maybe you can give us the metrics on Shop-n-Shops in the fourth quarter this year, versus fourth quarter last year?

And what the performance is like in retail with those shops?

Well, obviously, I can't tell you how they're going to perform in the fourth quarter.

But I can tell you that we have continued to see the type of increases in Shop-n-Shop as compared to the regular distribution.

So, typically a Shop-n-Shop is 40% to 70%, top line.

But depending on the Shop-n-Shop, we also have around, in the US, 40%--40%?

No, we have 70%.

We had 40% last year, 70% this year.

And internationally from 30% to 80%.

So we continue to drive the Shop-n-Shop concept as aggressively as we can, based on the ROI.

And so, retailers are pretty bullish about the Shop-n-Shop opportunity.

Okay, thanks a lot.

Sure.

Our next question is from Jonathan [Grassey] of Longbow Research.

Please proceed with your question.

Hey guys, it's actually Beth.

Can you hear me?

Sure.

Congratulations on a good quarter.

Thank you.

Thank you.

I'm actually in London so I see a lot of people wearing the UGGs.

Oh, and Tom, welcome.

Thank you very much.

So I have a couple of questions, I guess.

Have you guys broken out the size of the UK business currently?

We have not.

We have not, at this point in time.

Could you give any color as to what percentage of international it comprises?

It's the majority part of our business of international.

It's the majority of the international business?

It's the largest market outside the United States for us.

Okay, all right.

That's helpful.

And then, when did you guys start selling to Victoria Secret?

Because, I just noticed that this year.

Was that the case in prior years as well?

Yes, it's been quite a few years now.

They're one of our long standing customers.

We've been with Victoria's Secret now for, I think, at least five years and probably longer; since before I came.

Do you think they'd be in the top 10?

Good question; we can look that up.

We typically don't disclose where they fall but they're one of our -- they are one of our bigger accounts and a very important one.

Okay and then, I guess the other thing is, I might've missed it but I feel like I've been at a lot of UGG stores.

This SNEAKER collection, that's for UGG and is that already out?

Or, is that coming out?

That's a Spring product line.

So, is that kind of like the Hogan sneaker but with sheepskin on the inside?

It's really soft leather on the outside, obviously, and lined in sheepskin.

Not completely but in certain parts of the shoe, the sheepskin is used to enhance comfort.

They're beautiful shoes and we've gotten a great response from retailers.

And what's the price point on those?

Top of my head, $120.00.

Okay; all right.

I look forward to seeing them.

All right; thanks, guys.

Thank you, Beth.

Our next question is from Andrew [Byrnes] of Thomas Weisel.

Please proceed with your question.

Can you hear me

Yes, we can.

Great.

This is Andrew Byrnes, in for Jim Duffy.

You highlighted the $5 million in cost savings in the quarter.

Could you discuss the potential to take any additional costs out of the system, in addition to that $3 million?

And also, does all of the $2 million that was postponed fall directly into the fourth quarter?

Thank you.

Yes, the $2 million does shift over in the fourth quarter but, you know, as part of our forecasting process, we did find some additional savings in the fourth quarter even to offset that.

So, that's why you'll see we've improved our guidance for the fourth quarter in SG&A as a percentage of sales.

And the $3 million is that our permanent savings; as we march on here and gain efficiencies and gain leverage on our operating expenses, we find savings as time goes on.

We've got a big effort from a distribution center and a warehousing point of view to cut our costs and increase efficiency.

So that is one of the other things that we had a good improvement there, relative to our original expectations.

And the product is selling, you know, selling very well.

So, as a result of that, you don't need as much sales and marketing as originally anticipated.

So, that's some of the reason why we had the permanent savings in the third quarter.

Great, and the tremendous comp that you've produced in your retail stores; is the primary driver there increased traffic?

Or has there been any significant changes in average ticket or transactions?

Well, I think the breadth of the product line has contributed significantly to the average ticket in the stores.

The accessories sell well; the outerwear that we've had sold extremely well.

Our slippers are often an add on sale.

In other words, a consumer comes in looking for, say, a classic tall and they end up buying a pair of slippers for their boyfriend or husband, for example.

So, I think it's just a matter of people discovering the breadth of the product line.

And that is translating into a higher average ticket.

Great; congratulations on the quarter.

Thank you.

Thank you.

Our last question will be Omar Saad with Credit Suisse.

Please proceed with your question.

Hi, thanks.

Good afternoon; thanks for taking my question.

Just two quick questions; number one, I've been hearing a lot out there about the strong boot cycle, you know, boots this year, plus denim, I think, goes well with that trend as well.

Is that what you guys are seeing?

And if so, you know, how do you feel about the UGG positioning and your product line positioning as of any other kind of styles or competitors out there in the "boot arena" that you're looking at, you're watching carefully?

Well, yes.

You know, it is a strong boot cycle right now.

I think one of the advantages of our product line, it tends to, by consumers, be seen as a comfort item, independent of its nature as a boot.

You know, people wear the Kosi UGG product.

It's very light weight; it's very flexible.

It doesn't feel like a boot on your foot yet it keeps you warm.

So, it's a little different than a conventional boot, which is a more structured type of product.

That said, we also have quite a few new.

If you go on our website, you can see a lot of new boot items that are performing quite well at retail.

Wedges, heels, flat boots, in addition to all of our classic and now knit boots.

So, it just seems as if the entire category is so diverse that it's hard to compare it to everyone else's boot offering.

We offer products that, by comparison, makes other people's boot offerings very one dimensional, it seems, you know.

And I think that's the real strength of what we're doing.

Okay but it sounds like boots are in.

Boots are in, but, more important for us, comfort is in.

And once comfort is in, it never goes out.

Got it; one more question.

Can you guys help me understand the disparity.

I know there was a little bit of a timing issue last year, but the disparity between your online kind of trends, versus, you know, versus virtually kind of every other channel for the UGG brand.

Disparity in what way?

You mean, the --?

Yes; the fact that that -- the Internet sounds like the sales are down a little bit but you're still experiencing strong growth, kind of pretty much in all your other channels.

I think this year, what we're seeing is that it seems to be a trend across all of Internet selling.

You know, the consumer, in some cases, this year, perhaps, the UGG product was more available than it had been in previous years.

So the consumer didn't have to buy it only online.

They could see it in their local Nordstrom door or Dillard's door.

What we're seeing in the last few weeks, however, is that the online trend is starting to parallel the regular retail trend, which is a good indicator.

But prior to the last few weeks, online sales had lagged behind this year.

Okay; thanks.

We'll see how that plays out.

Thanks for taking my questions; good luck.

Thank you.

Thank you.

Thank you, ladies and gentlemen.

I would now like to turn the floor back over to management for closing comments.

I want to say, thank you all very much.

We appreciate your questions and your support.

I just again want to congratulate the UGG team; Connie Rishwain and her group, as well as the Simple group and the Teva group.

They've done a wonderful job in inventory management and bringing new product to the market, which bodes well for 2010.

So, take care and we'll speak to you next quarter.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.