Deckers Outdoor Corp (DECK) 2010 Q3 法說會逐字稿

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

We come to the Deckers Outdoor Corporation Third Quarter Fiscal 2010 Earning 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 questions.

(Operation 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 are 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 its 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, general economic conditions, the weather, and the choice of its retailers 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 will now turn the conference over to your President, Chairman and Chief Executive Officer, Angel Martinez.

Please go ahead, sir.

Well, thank you, everyone, for joining us to discuss our third quarter 2010 financial results.

With me on today's call are Chief Operating Officer, Zohar Ziv and Chief Financial Officer, Tom George.

I'll begin with a review of our recent performance, including the key drivers of the business.

Then Tom will review our financials in greater detail and outline our upwardly revised guidance for the full year.

Then I'll return with some brief closing comments about the future plans and strategies.

Our third quarter was better than expected across the board, with sales, gross margin and earnings all coming in ahead of projections.

The upside was primarily driven by better than expected sell through of the UGG fall line and our company-owned retail stores, coupled with higher than anticipated international demand for the brand.

Telesales also contributed nicely, with growth across all channels and regions, leading to the brand's strongest third quarter in several years.

From a product perspective, our business continues to diversify.

The UGG brand's fall collection is the most complete line of footwear we've developed including classic, knit, cold weather, casual and fashion boots, along with a broad assortment of slippers, wood bottom clogs and sneakers.

I encourage everyone to stop by one of our stores, including our newest locations in Miami, Georgetown, and New York on Madison Avenue, or visit our e-commerce site to get a full appreciation of the breadth and depth of this season's line.

You'll find that we have products which can be worn for almost any occasion, in around the house, to work, in warm or cold weather, and out for the evening.

And this has allowed us to capture a greater share of the women's market.

Consumers who were introduced to the brand through their first pair of classics have followed that up with pair of slippers.

Those same consumers are now buying our cold weather product and replacing their traditional calf high leather boots with a pair from our fashion collection.

Looking at the full line, you get a sense of the brand's diversity and broadening appeal to an increasingly sophisticated consumer audience.

As a matter of fact, our market research indicates that 77% of UGG brand female consumers are 18 to 54 years old.

Of that, 47% are 18 to 34, and 30% are 35 to 54.

New for this year is our collaboration with Jimmy Choo on a special line of limited edition boots.

These just began selling last week at select retailers, our UGG Australia concept stores and our website, and Jimmy Choo stores world wide and their website.

Jimmy Choo sold the collection into their distribution, so it's being carried by high-end retailers like Bergdorf Goodman, Saks Fifth Avenue, Nordstrom, Harrod's and Galeries Lafayette in Paris, in addition to salon independents all over the world.

You may have seen the global ad campaign around this collection, including print in fashion magazines in the US, Italy, UK and Japan, as well as billboards and window displays in Paris, New York, London, Japan, San Francisco and Chicago.

This partnership with Jimmy Choo further validates the UGG brand as the category creator as we're seeing more and more premium brands like Burberry and Chanel utilizing sheep skin in their footwear and apparel collections.

Looking at our distribution channels compared to this time last year, we've expanded our presence across our national base of better department stores, speciality chains and key independents.

As we've previously detailed, we've increased our domestic Shop-in-Shops to approximately 100, up from 74 last fall.

Our retail business continued to experience strong growth.

Same store sales for the quarter were up 17.9%, for those stores that were open for the full three-month period ending September 30th, 2009 and 2010, and our new stores continue to perform at high levels with strong four-wall contributions and quick pay backs.

Teva's Q3 business was also much more diversified than previous years, thanks to the growth and evolution of the brand's open and closed-toe footwear.

Our collection of light hikers and technical sandals helped fuel our strongest spring season in more than a decade, and has generated positive momentum as we move into the second half of the year.

For fall, we supplemented our closed-toe offering with additional multisport products at $100 plus price points that are selling very well.

Our women's lifestyle products, most notably boots, are also off to a very good start at retail.

What we're seeing speaks to the success we've had many targeting a younger, more active consumer, and repositioning the Teva brand as a year-round brand.

Our overseas business continues to gain pace.

In Europe, the UGG brand is experiencing its best season ever.

Our distributors in the UK and the Benelux are supporting very diverse assortments for the fall, including greater percentage of new styles.

Based on the feedback we're receiving, the response from consumers has been very favorable.

We're also seeing this trend in our UK retail stores, where sales data indicate that consumers there are buying all styles of the brand's new looks.

We're all experiencing similar results with the UGG brand in Japan.

In switching to a wholesale model at the start of 2009, we've built an experienced team that is selectively adding new retailers, improving productivity and existing accounts, and delivering an enhanced brand message to consumers.

Given the strong performance of other luxury brand in Japan, we believe we'll continue to grow the UGG business from where it is today.

In China, we recently opened three new UGG retail stores, with two this quarter in Shanghai at Plaza 66 and Hong Kong Place, and the other in late June in Shenyang, Palace 66.

We're all very encouraged by consumers reaction to our stores and product line, and were highly optimistic about the UGG brand's future in the China market.

Tom will now go through the financials in more detail.

Tom?

Thank you, Angel.

In the third quarter of 2010, net sales increased 21.7% to $277.90 million, compared to $228.4 million in the third quarter of last year.

Net sales of UGG products increased 20.2% to $255.8 million, versus $212.8 million in the third quarter last year.

Net sales of Teva products increased 51.7% to $13.7 million in the third quarter, compared to $9 million in the same period of 2009.

Combined net sales of the Company's other brands increase 26.5% to $8.4 million in the third quarter of 2010, compared to $6.6 million a year ago.

Included in these numbers are global retail store sales of $20.2 million, up 63.3% from $12.3 million in the third quarter of 2009, driven by eight new stores and a same store sales increase of 17.9%for those stores that were open for the full three-month period ended September 30th, 2009 and 2010.

Sales for our e-commerce business, which are included in the brand sales numbers, as well, increased 3.8% to $8.7 million in the third quarter, up from $8.4 million in the prior year.

The e-commerce business faced difficult comparisons to 2009 as prior year sales included larger closeouts for Teva and the other brands.

Also included in the brand sales numbers, domestic sales for all brands increased 14.3% to $204.7 million, compared to $179 million in the third quarter of last year.

And international sales increased 48.2% to $73.2 million, compared to $49.4 million in Q3 2009.

International sales were 26.3% in total sales, up from 21.6% last year.

Gross margins for the current quarter improved 420 basis points to 47.1%, compared to 42.9% in the third quarter of last year.

This increase was driven by an increased mix of retail sales, direct distribution for the Teva brand in the Benelux, duty refunds, reduced closeout revenues, and overall improved margins for all brands.

Total SG&A expense for the quarter was $64.6 million or 23.3% of net sales, compared to $44.9 million or 19.6% of net sales a year ago.

SG&A increased primarily due to increases in payroll expenses due to costs associated with eight new retail stores that were not open during the third quarter last year, operating expenses for our direct Teva brand operation in Benelux, international distribution start-up expenses, as well as additional increases in variable expenses with increased sales.

Operating income for the quarter was $66.3 million or 23.9% of sales, compared to operating income of $53.1 million or 23.2% of sales last year.

The improved operating income was attributable to the aforementioned increases in sales and gross margins.

Net income for the third quarter of 2010 increased almost 25% to $42.1 million, compared to net income of $33.8 million in the third quarter of 2009.

And diluted earnings per share increased 24.4% to $1.07, versus diluted earnings per share of $0.86 in the third quarter of last year.

Please note that all share and diluted earnings per share amounts discussed in the call, including the amounts for prior periods, take into account the 3 for 1 stock split that was distributed in July 2010.

Now turning to the balance sheet, at September 30, 2010, our overall inventories increased 5% to $197.3 million, versus $187.8 million a year ago.

By division, UGG inventory rose 3.1% to $180.3 million, Teva inventory increased 61.5% to $11.2 million, and our other brands inventory decreased by $.1 million.

The increase in UGG and Teva brands inventory was required to support our expected increase in Q4 sales.

In addition, at September 30, 2010, we had cash and cash equivalents totalling $250.5 million, up almost 100% compared to cash, cash equivalents and short term investments of $125.6 million a year ago.

Accounts receivable at September 30, 2010 were $142.2 million, compared to $112.9 million at September 30, 2009.

During the quarter, we repurchased approximately 170,000 shares of our stock for $7.4 million at an average price of $43.89 per share.

We have approximately $20 million remaining authorized on our current share repurchase program.

Moving on to our outlook, based on our better than expected third quarter results, we are raising our 2010 guidance.

We now expect 2010 revenues to increase approximately 16% over 2009 levels, up from our previous guidance of approximately 14%.

For the full year, we now expect UGG brand sales to increase by approximately 15%, up from our previous expectations of 13%, and Teva sales to increase approximately 30%, up from our previous expectation for growth in the high 20% range.

This will bring Teva sales to over $100 million for the first time ever.

Our other brands combined are still expected to increase approximately 15%, consistent with the previous guidance of 15%.

We currently expect diluted earnings per share to increase approximately 22% over a split adjusted 2009 non-GAAP diluted earnings per share of $2.98 per share, which excluded a noncash impairment on intangible assets of $1 million as discussed in our associated earnings release.

This is up from our previous guidance of approximately 16% growth.

Our forecast is based on full year gross margin of approximately 49% and SG&A as a percentage of sales of approximately 25%.

As a reminder in preparation for the change from a distributor model to wholesale model for the UGG, Teva and Simple brands in the UK, and the UGG and Simple brands in the Benelux region in 2011, as well as the Teva brand Benelux, France transition this year, we will incur additional expenses in 2010 with new initiatives to establish the infrastructure necessary to support broader wholesale operations beginning in 2011.

Also because of these transitions, approximately $10 million of sales will shift to 2011 under our wholesale model that would have previously been recognized as international sales in November and December of 2010 under the former distributor model.

In total, these incremental expenses in the profit shift of $8 million will have an estimated diluted earnings per share impact of $0.13 of which approximately 65% is a one-time impact.

Excluding these costs, we expect diluted earnings per share growth at 26% over 2009 levels.

Furthermore, due to the impact of our international pre-tax income from the aforementioned expenses in 2010, our effective tax rate is expected to increase slightly to 36.8% from 36.2% in 2009.

Our capital expenditures in 2010 are expected to total approximately $25 million, a $10 million increase from our 2009 level of $15 million.

This is driven mainly by the build out of new retail stores, as well as the new e-commerce platform and PLM software.

For the fourth quarter 2010, we still expect both revenues and diluted earnings per share to increase approximately 8% compared to fourth quarter 2009 levels.

Fourth quarter guidance includes approximately $5 million, or $0.08 per diluted share of incremental investments associated with the international distribution transitions, as well as the aforementioned higher levels of fixed overhead.

I'll now turn the call back to Angel for some closing comments

Thanks, Tom.

So there's a lot to be excited about as we approach the holiday selling season and look forward to next year.

We believe that we're developing great products and compelling lifestyle messaging to create strong global momentum for the UGG brand and now the Teva brand, as well.

We're seeing it in our markets world wide, retailers are hungry for our brands.

Zohar and I recently returned from Asia, and it was clear during our visit to Japan that consumers have developed a true affinity for the UGG brand.

Our new team has done a great job of re-igniting interest in the brand and they're making great headway, building the right wholesale distribution and searching out potential new store locations.

We saw similar trends in China, which is now the world's second largest luxury market, thanks to a growing population of consumers who want the brand names like UGG and Teva, not cheap imitations or knock-offs.

The sell through results from our four UGG stores in China speaks to this new wave of demand which we believe will continue to grow for some time.

As I mentioned earlier, our European business is doing very well as awareness of our expended product assortment continues to spread across the continent.

We're very excited about bringing all our distribution in the UK and Benelux in-house, and we're confident that the UGG and Teva brands are ideally positioned to attract new consumers in these regions, as well as other key countries such as France, Germany, Russia, and Italy to name a few.

Here in the US, newness is driving our business, and we believe that this will continue in spring 2011 as we further diversity the UGG line with additional non-boot styles such sneaker and sandals.

Next month, we'll begin pre-lining fall 2011 with our major accounts, and we're confident that we can build on the positive story lines from the season.

This is also true for the Teva brand as our light hikers and multisport collection become more meaningful to the spring line.

In fact, more multisport product is sold in spring versus fall, so there's a true opportunity for us to increase our share of this key outdoor category.

For 2011, the financial benefit we expect from our upcoming conversions to subsidiary models in Europe is very timely.

In that, for 2011, we now anticipate input cost increases will be toward the high end of the 5% to 10% range we discussed in our second quarter call back in July, due mainly to rising commodity prices.

In addition, based on the global trends our businesses are experiencing and our growing cash position, we believe 2011 is the opportune time to make select strategic investments in our business that will accelerate market share gains in 2012 and beyond.

Areas that we're looking at include an accelerated retail expansion, increasing the number of annual store openings beyond the nine planned additions that we have this year, new marketing and sales initiatives to accelerate the Teva brands growth and increasing awareness for our Tsubo brand.

On a larger scale, we believe there are significant growth opportunities to the UGG men's line, and our recent market research for UGG products indicate we still have significant growth opportunities with women.

Therefore, we plan to increase our investment in the UGG brand to bring our brand spent as a percentage of sales up to be more in line with premium global brands.

This should help us capitalize on the global opportunities we believe exist for the UGG brand in both men's and women's categories.

Lastly, we'll be investing in additional advertising and point of sale materials to support our transition to wholesale sales in the UK and Benelux.

We're still in the planning process for the next year and continue to evaluate the most effective ways to deploy our capital.

We will lay out our investments and the benefits when we discuss our 2011 guidance in our next call in February 2011.

In addition, we continue to evaluate potential acquisition opportunities.

We remain very optimistic about the long-term potential of the UGG and, Teva brands and are becoming more excited about the prospects of the simple Tsubo and Ahnu brands.

Everyone at Deckers is energized about the business, and our global organization is focused on successfully executing our growth strategies to return significant long-term value to our shareholders.

Operator, we're now ready to open the call up for questions.

Thank you.

We'll now be conducting a question-and-answer session.

We ask that you limit questions to one and one follow-up to accommodate as many questions as possible.

If we have time, we will repoll for additional questions.

(Operator Instructions).

One moment while we poll for questions.

Our first question comes from Sam Poser from Sterne Agee.

Good afternoon, everybody.

Can you just give us a breakout of the operating, all the operating income by segment just to help us?

Yes, Sam, I can do that for you.

We had strong operating income for the quarter.

So UGG is obviously the biggest driver there, and then Teva and the other brands, you know, are lower numbers more at the break even kind of level for the third quarter in the retail stores.

And keep in mind on the retail stores, we charge them cost of goods sold at wholesale.

So they have lower operating margins compared to the total vertical margin when you include the brand margin, which is included in UGG.

Right.

So you have the numbers or do we have to wait for the Q?

I'll go ahead.

So for UGG wholesale which includes the brand margin on the retail store was approximately $96 million, Teva and the other brands is close to a break even, e-commerce was approximately $1 million of operating income, retail stores close to $2 million, and then there's unallocated corporate type overhead costs that go the other direction of approximately $30 million.

That gives you the $66 million of operating income.

Thank you.

Thank you very much.

Angel, when you were looking at next year, I mean, can you give us some read through as to, you talked about your additional investments.

Can you give us some idea of how you're looking at the impact to gross margin next year with those -- with the Benelux and UK and France switching over?

Well, I mean, we anticipate gross margin to remain consistent with where we've been.

Our fundamental focus is to drive the business in those markets where we feel we have market share gain opportunities.

Certainly in the UK and Benelux, we've put together a very strong sales force.

We've established the brand across a wholesale spectrum, as well our own retail operations.

I think it's to that point now where the brand will benefit from more aggressive competitive approach to the market from us, meaning that more rollout of our shop-in-shop program, more spread and assortment across the wholesale channels, we'll be developing our e-commerce platform to really go after the market.

And we anticipate as we roll forward that the Benelux will be moving in similar directions.

Okay.

Thank you.

I'll get back in the queue.

Thank you.

Our next question comes from Todd Slater from Lazard Capital.

Thank you and congrats.

Super job.

It sounds like you're going after the retail store opportunity even outside of the US, maybe even more aggressive than the US.

I'm wondering if you can talk a little bit about how that strategy is now evolving.

You've been into it for several years, both inside and outside of the US.

And then the other question was if you could talk about where you stand on evolving the UGG brand into more of a lifestyle brand in terms of apparel and accessories and licensing and all the other parts of the equation there.

Thanks.

Okay.

Yes, Todd, as far as retail goes, it's a very difficult thing to ignore the consumers' love for the brand when they are exposed to total breadth and assortment of the brand, and in an environment that reflects the brand vision.

We've been seeing that as we've been refining our approach around the world.

As I mentioned, Zohar and I were just in Asia, and compared to what we see in Europe, we see the same thing happening in Asia with consumers responding in exactly the same way.

So the opportunity that exists around the world for us to solidify the category leadership of UGG is very important and one that retail does better than anything else, particular in markets like Asia -- rather like China where there is no wholesale business.

It is only -- brands are built on a retail foundation, and so for us to dawdle too slowly into that market, I think it puts at risk the category leadership opportunity that the brand is known for and the brand has established.

So we're going to keep moving on that front, and we'll move aggressively for us.

It doesn't mean we're going to open the doors, open retail doors willy-nilly, but we take this seriously.

I said from day one that our stores need to make money; they're not marketing expenses.

And we're running very profitable stores.

When it comes to the apparel and accessories, we have been refining that approach, as you know.

We've had cold weather accessories through our licensee, that's hats and gloves and scarves.

That's doing very, very well.

And we have now begun the process of developing our own handbags and our own outerwear.

And that business, as well as -- by the way, we're doing knitwear for this fall, as well.

That business is very important as we round out our retail assortment.

It's critical to have a complete brand story of retail.

We're now developing to a base number of stores that allow us to do small runs of outerwear, small runs of knitwear, small runs of handbags, and that creates a well-rounded assortment of retail.

When our wholesale customers see that, it creates demand for that product in the wholesale environment.

So we're building it in that sense, very methodically, obviously, tying in the shop-in-shops as we've developed them with key retailers, as well as the internet.

So that's really the approach we're taking

By the way, you've got some great Jimmy Choo windows here in the flagship Saks store in New York.

They are beautiful.

Thank you.

Good luck next quarter.

Thanks.

Thanks Todd.

Thank you.

Our next question comes from [Shawn Nodden] from Piper Jaffray.

Thanks for taking my question.

On the gross margin front, could you give us an idea of -- Tom, you gave us some of the breakdowns of the gross margin improvement of 420 basis points.

Just wondering if you could put -- codify some of those numbers for us.

And then secondly, obviously talking about sourcing costs being toward the higher end of that 5% to 10% range, but I think

Angel, you mentioned you were looking to hold gross margins relatively consistent to this year for next year.

That's kind of the goal right now it sounded like.

I'm just wondering how that's going to work.

Should we expect a combination of potential ASP or mix between retail and international?

Just how should we think about that for the next five quarters here or next year

This is Tom.

I'll respond to the 2009 to 2010 comparison.

So we were up 420 basis points.

The lying share of that was really amount 200 basis points of that just improved initial margins on the UGG brand, especially on the UGG brand, as well as the other brands, including Teva, and then some of the other items I mentioned.

Reduced closeouts and markdowns was about 40 basis points improvement year over year.

We had a small amount for the residual amount of the duty draw back, duty refund; that was only about 30 basis points.

Higher content of retail sales this year compared a year ago was 50 basis points.

The fact that we're direct in Europe with Teva, you know, it's a smaller Teva quarter, but that about 10 to 20 basis points of improvement.

As we go through the questions about product costs and how we're going maintain our gross margins, as we indicated, the increase of the cost is really coming mainly from the commodity, so we're going to be on the top range of the 5% to 10%.

How we are planning to hold our margin is the combination of both increasing prices more appropriately and also getting the benefit of the conversion.

They are in (inaudible) subsidiary and more internationally.

And also combination of going direct and increasing our retail operation.

Okay.

And then, maybe on the marketing, you talked about, maybe you could just elaborate more on some of the things you could potentially be embarking on in terms of new marketing initiatives on particular demographics that you may be going after more aggressively, and then any way that you can quantify the amount of that additional marketing spend that we could potentially see next year

You'll see, for example, I mentioned the women, female consumers, and 77% of them are between the ages of 18 and 54.

There is a very large percentage of the population that is -- that we call prospects.

These are people who expressed an interest in UGG, an affinity for the brand and have just not had the exposure to it or not had the opportunity to purchase it, have a purchase intent, and so that's an opportunity for us to add to the following that we have for the brand in the core audience of female consumers.

The men's market is a market that we feel we have a very good opportunity in, given the success we've had traditionally with cold weather product and our success with slippers and recent success with some casual product we've had in sneakers.

From a brand perspective, if really you look at us historically, the UGG brand has spent about 2.5% of sales, 2% to 2.5% of sales on marketing.

Other brands of this caliber, for example, are Ralph Lauren, brands that you know worldwide are very successful, lifestyle brands and fashion brands, spend 3.5% to 4%.

So the delta between the 2% and the 4% is an opportunity for us to very selectively and very methodically put marketing dollars at work to grow our brand franchise and solidify a larger consumer share.

So you'll see us doing that.

You'll see a mix of marketing activities from social network base to more conventional media to certainly in-store presence and variety of things like that.

That makes a lot of sense

All the signs are still coming together, as you know, and we'll be able to talk more about that in the February call.

And then just quickly, lastly, sounds like Teva, lot of gains being made there; it sounds very promising.

Can you remind us just how big you think that business could ultimately be just based on, you know, what your expectation is right now and when you could hope to achieve your long-term goals or near long-term goals with that brand?

Thanks

Sure.

It's not unreasonable to see the Teva brand double in size over the next few years, particularly with the momentum we're getting outside the United States.

The brand is actually very famous and authentic in Asia, especially China.

We're really just scratching the surface as to what we can do in China.

Without getting too far out on the horizon, if you look at the Teva brand of $100 million, could you see a $200 million Teva brand in the next three or four years?

I think that's very, very reasonable.

I think it's very doable.

And now that the product line has come together as a year round brand, male and female and kids, that makes that potential much more realistic and everybody's pretty excited about that

Great.

Best of luck in the fourth quarter

Thank you.

Thank you.

Thank you.

Our next question comes from Chris Svezia from Susquehanna Financial Group.

Good afternoon everyone.

Congratulations.

I guess first I want to go back to the info cost question, high end of the 5% to 10% cost increase, I guess everything that you guys are doing with regard to sourcing in China and moving more inland, something you've done already, and obviously looking to Vietnam, how much of that potentially offsets that or mitigates that pricing pressure to a degree.

I'm trying to get your sense there.

And then maybe give us an idea of how much is Vietnamese sourcing versus in mainland China.

Chris, the main impact for the increase of the cost toward the upper end of 5% to 10% is really from the commodity which is really the sheep skin for us.

So we have done, as you said, we have moved the operation from southern China to northern China to Vietnam.

You do get some benefits, but the driving force was the commodity cost.

So Vietnam, even the pricing is a little bit lower than China.

What you do get is the productivity is lower.

So you're not getting a significant benefit, but you're getting -- you're holding increases vis--vis what the price increases in China.

So that --

All you're getting a stable labor force, where the challenge in China and southern China has been the labor force.

With the migrants, the type of labor force in Vietnam, the people live around the factories.

One thing, Chris, that we refuse to do, we won't do, is lower the quality of the sheep skin that we select for our production.

Almost without exception, you'll see the people doing the knock-off brands.

And obviously, the counterfeit folks, they're buying the lower end of the sheep skin available, and probably getting that a little cheaper price than hat we're paying.

We just refuse to go there.

We think our customers deserve a lot more than that.

Okay.

That's helpful.

And then just -- I'm curious, I guess, two questions quickly for you Angel.

Your thoughts about this holiday in terms of any -- obviously, you were off to a good start.

It seems like you made some comment about you've seen some incremental acceleration in the business and sell through as you've gone into the fourth quarter.

So it seems like you feel very confident about holiday and how it will unfold.

But secondarily, any thoughts about pre-books for spring.

Obviously, you have that put to bed it seems at this point.

Can you give color or commentary on what you're seeing?

Obviously, Teva I think is pretty strong.

I would assume you're pretty happy with what you're seeing there.

Any thoughts about how the UGG pre-book looks for spring thus far?

Any color you can add to that would be certainly helpful.

Well, it's obviously difficult to talk about spring at this point.

Put it this way, we really don't -- we're not disappointed.

We feel that the brand momentum continues across all channels of distribution.

And, you know, there's been a lot of excitement.

We've seen it for the new line.

And a lot of excitement I'm sure will emerge from the fall line that we'll begin prelining here in the next three to four weeks.

Okay.

All right.

Thank you very much.

Best of luck.

Thank you.

Thank you.

Our next question comes from Chi Lee from Morgan Stanley Smith Barney.

Actually, this is Steven Gregory with Mandalay Research.

Couple of things.

You guys mentioned that e-commerce sales increased to 3.8% to $8.7 million.

But it's kind of skewed because of last year's closeouts.

Can you provide some color on the call today, what is your conversation going forward for the next couple years and how do you plan to get there, obviously, initially with the relaunch of your platform?

Can you clarify that a little bit, please?

What is your e-commerce vision going forward?

You're relaunching some of the different sites doing a new platform.

What is your e-commerce going forward and how you plan to expand your sales online?

One of the things we're seeing is that e-commerce, whereas it may have started out as a selling vehicle, if you will, in other words, brands, almost by default, found themselves, developing an e-commerce platform just to complete a transaction, perhaps enhance some customer service so consumers make it easier to get to the brand.

We think now that e-commerce is an intrinsic part of the brand experience.

We feel that e-commerce is by some consumers the way they educate themselves about product and then they go to a retail environment.

Or in many ways, e-commerce completes a relationship with consumers.

They feel that they need -- they are inviting, they're being invited in to the brand itself and are able to have a special relationship with the brand.

So e-commerce is evolving as a very core component of our marketing strategy.

I think social networking is another core component of the marketing strategy.

And when all of it is looked at, you cannot separate what's happening at retail environment with the shop-in-shop environment, with an e-commerce, with the social network environment and media environment.

So, our platform, what we're developing, is going to allow that kind of flexibility, that kind of technical capability to allow a consistent message and a timely message, almost a real-time message for consumers who value the brand and want to be part of the brand experience.

Obviously, that's not easy, but I think that's the future.

It's certainly the future marketing and certainly the future brand building.

Okay.

And then a follow-up to that.

What are you guys doing to in turn bring more people to the site?

Obviously, social networking etc.

How are you going about capturing new customers?

Are you building any type of apps for the mobile phones to allow customers to download to their cell phones, allow them to purchase products on your website?

Yeah, we're looking at all those things.

Right now, if you look at the UGG fan base, UGG has -- I think it's 440,000 Facebook fans which is a crazy number, especially when you consider that we really haven't done much to enhance that list-building capacity or fan-building capacity.

We have so many fans coming to the brand just out of enthusiasm.

What we do with those fans and how we react with them, that's what's emerging.

And I wish I could be more specific than that.

Those fans are developing, we're doing quite a bit of research, and we have employed very capable outside resources to help us refine this strategy.

And by the way, it's a moving target.

It's something that's emerging as we speak with new platforms like the iPad, with new technologies that allow -- from bar code scanning and instant messaging on your iPhone, on and on.

So it's something you must get plug into and stay on top of, and that's what we're doing.

This is Zohar.

As a follow-up, in addition to the various social marketing methods out there that we are already doing and using outside consultants to help us with that, we're all upgrading the technical capability of the site.

We're implementing a whole new platform that will be in operation next year, and it will allow us also to expand the e-commerce overseas.

So we are expanding our e-commerce operation overseas.

As for the potentials, for example, I know that the e-commerce sales for the quarter were slightly over 3%, but the UGG e-commerce grew 16.5% domestically.

So that's greater than what we've done domestic -- in the domestic wholesale.

So it was a nice uplift from e-commerce.

Thank you.

Our next question is coming from Scott Krasik from BB&T.

Thanks.

Just wanted to parse through some of your comments on how the business accelerating, is that across the board?

I know there have been a lot of reports that the Classic business lagged in August and September, so are you specifically referring to that fashion.

What are you talking about?

In August and September, generally speaking, especially when you have heat waves in various parts of the country.

Our business obviously kicks off when the weather cools off in terms of Classic.

Every year around this time we hear lots of comments about the classic business slowing down.

So every year around this time, we hear lots of comments about the Classic business slowing and every year around this time about a week or two from now you'll have a little cold snap and suddenly there's a rush to retail for the product.

We feel that, and what we've seen, seen strong evidence of this, that UGG has created a category, and the category is led by UGG and sheep skin footwear, in one form or another as seen in every brand from Prada and Gucci, all the way through the lines, is here to stay.

It's such a comfort component of footwear, we feel that we interpret this idea better than anyone.

We intend to continue the love affair that consumers have with the brand, as the authentic and most legitimate brand out there.

That said, the market, any market, will always grow, mature, develop, and evolve.

We have to stay ahead of it with innovation, with technology, with great design, and that's what we're making investments into.

We have been doing that since I came here and before.

So it is just an on-going part of trying to lead a market and every year the challenge is to be our own best competitor.

Right.

That leads me to my follow-up, I guess.

And it's a good problem to have, but retailers that we spoke with have said that the fashion product has sold great, but they don't have enough of it and you guy didn't invest in inventory to back it up to support them.

Do you think you're aggressive enough in terms of moving the brand forward?

Yes, we do.

We feel that certainly with our retail distribution and the quality stores, we work very closely with them to keep developing the UGG brand in those stores.

You can see the penetration of spread and assortment.

We plan very aggressively the increases in the Classic business; we have every year.

And I think what's happening, what you're seeing is Classic is not very narrowly defined by us anymore.

I mean, the Classic category is a fairly large category.

It includes a lot of different types of products.

So when you talk to a retailer about how's Classic doing?

You know, if they're defining Classic as chestnut, sand and black, Classic short, and not including in the definition of Classic all the other products that are emerging from -- we've done the cardi boots and a variety of other things.

Those are all Classic and those have been accelerating very nicely.

Yeah, I guess I was thinking more along the lines of the riding boots and the wooden bottom clogs, and those sort of things.

Yeah, we wouldn't call those Classic; that's more new product, that some of the diversified product line that you're not seeing, which you mentioned it, I mean, that is growing significantly, and it is dimensionalizing the brand at retail.

It's very exciting to see that happen.

So the consumer is seeing UGG as much more than what they originally came into the brand experience, and that's a good thing for everyone.

Okay, thanks.

Thank you.

Our next question comes from Omar Saad from the Credit Suisse Group.

I apologize if you've already said this, but was wondering if you guys could share, just focusing on the UGG brand, what the US wholesale number looked like, and maybe give us an update on your channel strategy for UGG in the US?

Are you guys thinking about expanding in the new distribution or staying tight on existing distributions, and I'm sure there's a lot of retailers out there knocking on your door, dying to get the brand in-house.

And then I have a follow-up question on some of the new brand initiatives you have.

Omar, this is Tom.

I'll go ahead and give you the growth and in our UGG US wholesale business.

So for the quarter it's up around 10%, and year-to-date it's up around 10%, as well, so we're pleased with that.

I'll turn it back over to Angel.

As far as our distribution, there are still segments of the country, sections of the country where we can develop the brand.

Further the southeast, primarily.

We just opened a store in Miami, which is doing quite well in its first few weeks of operation.

The market has continued to evolve, as I mentioned from its original chestnut, sand, black and Classic tall and short, and Ultra in some markets now.

There's a very diverse product assortment.

So we feel that we have a broad enough diversity of quality retailers that can take the brand through growth by category.

In other words, category by growth and brand, women, men kids, for the very near term.

Beyond the current core of our customers, we see, obviously, opportunity with our e-commerce platform, we see opportunity with expansion of doors by our current customers.

Nordstrom, for example, opening more doors, Key Independence who may open doors, and of course, our own retail store operations.

We also feel it is very important for retailer to be profitable with our brand, they have been and will continue to be because I think we're very careful in how we manage our distribution and we intend to continue that.

Okay, that's helpful.

Thank you.

And then on brand of (inaudible) it's very encouraging to hear that you're trying to really build it into a global brand and put the resources behind it.

Do you or have you considered working with agencies around the world, or at least in the US to think about different marketing platforms?Are you going to stick with what's worked from a marketing standpoint so far?

Well, marketing is one of those things, it has to keep evolving, it has to talk to a consumer in a language they understand in each market.

When I say language, I mean the marketing language.

So the platforms we've been using, which have been more traditional.

I think the more traditional lifestyle and fashion orientation.

We've been building the brand new very important fashion magazines.

We've used outdoor signage, billboards, et cetera, in key cities.

We've used retail presence and what we call BSM which is the in-store presentation.

We'll augment all of that stuff.

We were just talking social networking as a vehicle.

That's going to ramp up.

You'll see the brand showing up in what I would consider more, you know, opportunistic environments like events that may be happening in key cities.

We've done some things around the world that have been very exciting over the years.

We'll continue to do those in key markets around the world.

When you have a retail platform that allows you to bring consumers into a location, that creates buzz and opportunity for your PR efforts.

So it's really a total mix of marketing.

Our job is to figure out what the return on investment is with each of these categories with spending and marketing, and drive, obviously, more money to those things that are proven to work.

The good news is that you now have the capability to measure that.

Whereas in the past, as the old adage went, "50% of advertising works; I just don't know which 50%." Here in this case, we've got an opportunity to be much more precise with how we're spending our money

Thanks.

Great quarter.

Congrats.

Thank you.

Thank you.

Our next question comes from Jim Duffy from Stifel Nicolaus.

Thanks, nice quarter everyone.

Good afternoon.

Most of my questions have been answered.

I did have one question on the sneaker line.

Can you talk about where you're hoping to take that.

That's been a nice contributor for you this year.

Should be a four season contributor, and seems to have a lot of potential.

Where do you see this going next year and in future periods?

Well, what's great about the sneaker business, and I'm using that term loosely, because in a sense, these are casual shoes that are designed to look like sneakers.

You're not going to play any sports in them.

But the opportunity for color is fantastic when you start developing sneakers.

You can mix and match materials and fabrications in ways that you traditionally don't do and more contemporary classic styles of casual shoes.

It obviously appeals to a younger consumer.

It allows you to freshen up the brand presentation with a lot of color and materials and differentiation by a channel of distribution because, obviously,some of your retailers might have an older consumer, some might have younger.

So it offers, I think, a lot of opportunity to keep that UGG consumer excited about coming into retail and it's just fun.

It's fun products.

Fun to wear and fun to buy.

So Angel, my sense is this could become a meaningful contributor.

Am I off base there?

I know it was small this year.

Does it become meaningful in future periods?

I think I have a very good idea of how meaningfully contributory speakers can be having participated in that world for a long time.

So, yeah, this is a big opportunity for us.

I think that we are being, you know, we're trying to look at it with a different eye.

It's -- you kind of ask yourself the "what if" question.

If UGG were a sneaker, what kind of sneaker would it be?

And I think we've been asking ourselves that, and we keep coming up with surprising answers that consumers keep validating, so we'll keep doing that exercise.

Okay, great.

Best of luck.

Thank you.

Our next question comes from Bill [Fazilem] from Trade-In Capital Management.

Thank you.

That's TI Capital Management.

You had mentioned in your opening remarks that you had increasing enthusiasm for the Tsubo, Simple and Ahnu brands.

Would you please discuss what's leading to that increased enthusiasm, please

Well, my enthusiasm is always really taken from the retailer's enthusiasm.

My measure of success for an upstart brand is how willing are retailers to give you more real estate, broaden the spread and assortment, maybe push something off the shelf and replace with one of your items from a small brand.

That's very difficult to do today.

I mean, if I could snap my fingers and say, "Well, we're going use the power we have in the market to force product into distribution." We don't operate that way.

We feel every brand has to stand on its own merits and excite the consumer.

So retailers seem to be agreeing that these brands are gaining momentum.

There's some great styles, some great designs, great price points and we're gaining market share.

We're gaining shelf space.

So that's where my enthusiasm comes from, and it's coming from what I'm seeing all over the world.

It's not just the US.

Of course, these are still small brands.

But we really do have to start somewhere.

We had a lot of fixing to do across the board with these brands.

And, you know, to get them I think properly defined and envisioned and really build that brand platform for growth.

And I think we're getting there very quickly.

I'm looking forward to significant things in the next few years from the smaller brands

Thank you.

Following up on that, of the three brands, which of the three, if you had to choose, would you be finding the most enthusiasm by retailers or maybe said another way, which one could hit $50 million the first of the three of them?

You're asking me which of my kids is the best looking.

That's a really tough question to answer.

I don't think I can answer and not get myself in huge trouble.

Part of it depends on how you want to define.

For example, if you take the Simple brand and the product that made Simple famous for so many years, a shoe called "The Old School" and a woman's shoe called "The Sugar" those items were in a sense backburnered for a few years, and now they're being brought back to the front.

And what we're finding out is retailers love those items.

Those are great items.

They just wanted more color, more excitement, more assortment, more freshness.

So when we're showing Simple in the more, what I would say, the back to basic simple that we've been talking about with retailers in the last few months, there's a heck of a lot of excitement about that.

And guess what, that is very big category of products.

And with a very big pipeline to fill, you know?

You know, Van sells a lot of shoes.

Converse sells a lot of shoes.

I wouldn't mind being the number three brand in vulcanized canvas products as Vans and Converse.

That's a big opportunity.

So maybe Simple could be of all of them, the one that gets to a bigger number quicker because it's got a bigger pipeline opportunity.

That said, you know, Tsubo is a brand almost at the other end of the spectrum which is very exciting from a design point of view, the leadership brand and design.

It breaks a lot of molds, if you will, in terms of what is contemporary and how do you find that intersection of style and comfort.

And we don't expect that brand has a giant pipeline to fill.

But if we could be with Tsubo in every key footwear boutique that we need to be in the US and the rest of the world, that's actually pretty significant objective, and a very important thing to do.

It's kind of a different brand for a different purpose, if you know what I mean.

Thank you.

Keep loving those children.

Thank you.

We have time for one further question.

Our last question comes from John [Hurshtrip] from Sheffield Management.

Hi.

How are you?

I was wondering, you commented on how important it is that the weather always breaks sometime around this year.

Are you finding any problems in terms of just customers getting nervous or wholesalers getting nervous with the weather staying warm across the country through November?

I thought if we looked back into last year, you know, you really would have already seen it break at this point.

Obviously no one can control the weather, but curious at one point where you would actually get concerned?

If it's 85 degrees on January 15th in New York City, that could be a problem.

In the end, obviously, the weather is pretty cyclical.

If you look at California, as an example, the middle of winter here in southern California is 70 degrees, 65 degrees on the cold day?

And we saw a lot of UGG in that environment.

It really has to do with -- does it show, is there a chill in the morning, is there a chill in the evening?

It's UGG weather.

It's about a time of year as much as it is the actual temperature outside.

Now, functionally staying warm, sure, that's very important.

And when the weather gets cold the UGG product doesn't come off the feet at all.

It's almost like it's the time of the year that emerged for UGG as much as it is an actual temperature.

Every year, there are different cycles.

Few years ago, it was pretty warm through October, all the way through the beginning of November.

And then what happened was that we got pretty crunched for demand, and the weather just got a little colder, it didn't get really cold.

So it just depends.

It's a brand that consumers have a love affair with for a whole lot of reasons.

Cold weather is just one of the reasons.

Thank you.

Thanks.

Thank you.

I would now like to turn the call back over to Mr.

Martinez for any closing comments

Thank you very much for all of your questions and for participating on this call.

Clearly it's been an excellent quarter.

We anticipate that we continue on our trend.

We are very much looking forward to the February call where we can give you more detail on what we're planning.

It is important for us to really thank our entire team around the world, specifically our newly emerging team in Japan, our new emerging team in the UK and Benelux, as well as all of our retailers around the world.

We appreciate your support and look forward to being able to continue to develop your businesses together.

Thank you.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.