Deckers Outdoor Corp (DECK) 2011 Q1 法說會逐字稿

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

Welcome to the Deckers Outdoor Corporation first quarter fiscal 2011 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 for your questions.

(Operator Instructions)

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

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

Please note that certain statements made on the call regarding our expectations, beliefs and views about our future financial performances are forward-looking statements within the meaning of the federal securities law.

These forward-looking statements are intended to qualify for the Safe-Harbor-prone liability established by the Private Securities Litigation Reform Act of 1995.

These statements relate to the Company's anticipated revenues, expenses, earnings, gross margin, and capital expenditures and the outlook for the Company's markets and the demand for its products.

The forward-looking statements made on this call regarding our financial -- our future financial performance are based on currently available information, and because our business is subject to a number of risks and uncertainties, some of which may be beyond our control, actual operating results in the future may differ materially from the future financial performance expected at the current time .

Deckers has explained some of these risks and uncertainties in its earnings press release and in its SEC filings, including the Risk Factor section of its annual report on Form 10-K and its other documents filed with the SEC.

Listeners are cautioned not to place undue reliance on forward-looking statements which speak only as the date hereof.

The Company undertakes no obligation to publicly release or update the results of any revisions to forward-looking statements.

I would now like to turn the conference over to the President, Chief Executive Officer, and Chair of the Board of Directors, Angel Martinez.

Please go ahead,

Well, thank you, everyone, for joining us today.

With me on the call are Chief Operating officer Zohar Ziv from London, and Chief Financial Officer Tom George.

We're pleased with our start to 2011.

We believe that the merchandising and marketing strategies we've place into place over the last few years have continued to drive growth in our domestic wholesale, consumer direct, and international distribution channels.

In addition, the direct wholesale business in the United Kingdom, Benelux and France aided our results.

In the first quarter we witnessed a strong response to our spring collections, and believe that many of our new product introductions have resonated with consumers worldwide.

Over the last several years, the UGG brand spring line has evolved considerably to include a diverse collection of fashion sandals, sneakers, slippers, knits, and boots.

It has performed very well over the last few years, resulting in more shelf-space with the majority of accounts this season.

This includes more than 250 shop-in-shops in key independence, in addition to the many customized displays created for the UGG brand by our department store partners.

Sell-through has been consistently strong across the board and we expect that demand for our sandals and sneakers will accelerate as the weather continues to warm.

The results in our retail stores have also been very encouraging.

We've added nine stores since a year ago, including several in warmer locations such as Miami, Los Angeles, and Las Vegas.

This helped drive sales early in the quarter when much of the country was covered with snow, and provided us with good initial reads on many of our spring styles.

Internationally much off the wholesale business to-date has been driven by core collections, and we believe an opportunity exists for our expanded product line.

We still plan to open approximately 15 new stores in 2011, the majority of which will be open during the back-half of the year and will be outside the US, primarily in Asia.

Our international business had its best first quarter ever due largely to the contribution of our newly converted wholesale business in the UK and Benelux.

The transition to selling directly to retailers has gone well for the most part, and the benefits from this move are expected to be even more pronounced later in the year.

Based on the fall pre-book, accounts in the UK will be carrying much broader merchandise assortment then last year, highlighted by more fashion boots, casuals, including sneakers, as well as several styles from our cold weather selection.

I'd also like to provide an update on our operations in Japan, but before I do, let me say how saddened the entire Deckers family is by the tragic events caused by the earthquake and tsunami on March11.

I'm happy to report that all of our associates and their families are safe and sound.

As you know we recovered our distribution rights in Japan in 2009, and since that time we've been strengthening our Management team, selectively adding wholesale distribution, and preparing and to open a handful of retail stores.

Japan, which was not a significant portion of sales in 2010, is predominantly a fall/winter business.

At this point we haven't received any significant order cancellations.

Our Tokyo stores remained open, and we're seeing traffic levels return to normal.

We did push the grand opening of our second store, also in Tokyo, for June; however we had a soft opening in April, and we're pleased with the results so far.

That store, by the way, is in the Ginza district.

I'm very proud to announce that the UGG brand received the Footwear Brand of the Year from the American Apparel and Footwear Association at the 33rd annual American Image Awards held in New York City last night.

This prestigious award is attributed to a great team effort Company-wide.

After a very strong 2010, Teva's gotten off to a good start this year, driven by the performance of several new product introductions.

As you know, we've e been working on transforming Teva into a more complete outdoor brand by leveraging its leadership position in sports sandals to capture a greater share of the much larger closed-toe market.

This collaborative effort between our product ,our marketing, and our sales team has resulted in shelf-space gains throughout our current distribution, and has also led to new distribution, including some retailers who walked away from the brand a few years ago.

We've also attracted a younger, more active consumer, as well as also reducing the brand's dependence on weather.

The first quarter certainly had its share of less-than-ideal conditions in many parts of the US, and this continues.

Despite this, we experienced solid sell-through thanks to the emergence of our expanded collection of light hikers, featuring eVent waterproof technology, and closed-toe water-friendly multi-sports shoes for men and women.

The performance of these products underscores our belief in the year-round potential of the Teva brand, and provides us with a powerful message when promoting our fall collection.

Now more recently, the momentum in our sandal business has picked up, and we expect the mantra of both traditional styles and new offerings to increase as we get into the category's prime selling season.

In Europe we see a lot of product opportunities similar to the US.

Now in its second year of operation, our Benelux wholesale business continues to perform very well, and we're making in-roads in France.

In the UK, the Teva brand is less developed and the market is more competitive, but we're pleased with the initial results from our conversion to a wholesale business model.

I'll now turn the call over to Zohar Ziv.

Zohar?

Thanks, Angel.

As you know, on January 1, we converted to a wholesale business model for the UGG, Teva and Simple brands in the UK, and regained our distribution of the UGG and Simple brands in Benelux.

The combined total of these businesses was approximately $7 million on a distributor basis last year, and consisted of more than 750 accounts.

These are our two largest markets, behind the US, which give you a sense of the size and complexity of the task our new team in Europe has been tackling the past several months.

I joined them in January to help oversee the transition and lead the search for the right person to run this business over the long-term.

With any new venture, there is a learning curve and kinks that need to be ironed out.

We experienced some delivery delays and softness in our four retail stores in the UK.

The good news is we expect those shipments to go out in the second quarter, so we believe we will see the sales catch up then.

We believe our retail performance was related to some operational issues that have now been resolved, combined with general weakness in the UK retail market due to recent posterity measures and a 14% increase in the VIT, which appears to be impacting consumer spending habits.

So with all that said, we are quite pleased with how things progressed during the first 90 days, and we are remain optimistic about our future prospects in the UK, Benelux and throughout the continent.

This optimism was reinforced with the recent appointment of Stephen Murray as President of Europe, Middle East and Africa.

Steve is a seasoned footwear executive and brings more than 20 years of brand-building experience to our Company.

I'm confident that he is the right person to oversee our growth in this region during this critical stage of our international expansion.

I'll turn the call now over to Tom.

Tom?

Thank you, Zohar.

I'll go over the financial results for the quarter.

In the first quarter of 2011, net sales increased 31.4% to $204.9 million versus $155.9 million in the first quarter last year.

Net sales of UGG brand products increased 42.2% to $148.4 million versus $104.4 million in the first quarter last year.

Net sales of Teva brand products increased 16.8% to $50.4 million in the first quarter, compared to $43.2 million in the same period of 2010.

Combined net sales of the Company's others brands was $6 million in the first quarter of 2011 compared to $8.4 million a year ago.

Included in these numbers were global retail store sales of $35.4 million, up 52.8% from $23.1 million in the first quarter of 2010, driven primarily by nine new stores.

In addition, our same-store sales increase 2.6% for those stores that were open were the full three months ended March 31, 2010 and 2011.

With regard to our same-store sales, as a reminder we were up against a tough comparison from a year ago when same-store sales increase 28.2%.

In addition, as Zohar just mentioned, we did experience softness in our UK retail stores due to some operational issues.

Excluding the four UK stores that are in our comp base, same-store sales in the first quarter rose 14.3%.

Sales for our global e-commerce business which are included in the brand, sales numbers as well, increased 27.3% to $23.5 million in the first quarter from $18.4 million in the prior year.

Also included in the brands' sales numbers, domestic sales for all brands increased 26.6% to $148.1 million compared to $117 million in the first quarter of last year, and international sales increased 45.8% to $56.7 million compared to $38.9 million in Q1 2010.

International sales were 27.7% of total sales for the first quarter, up from 25% in the same period last year.

Gross margin for the first quarter was 50%, flat with the year-ago period.

Gross margin was approximately 100 basis points below our guidance due to lower-than-expected international margins, driven by mix, lower margins for the smaller brands, and certain UGG and Teva brand deliveries in the UK that shifted into the second quarter.

While the sales were made up during the first quarter by stronger-than-expected domestic growth, the margins in our US wholesale business are lower than international wholesale markets.

Total SG&A expense for the quarter was $74.3 million, or 36.3% of net sales, compared to $49.1 million, or 31.5% of net sales a year ago.

SG&A increased primarily due to transition costs and operating expenses related to our transition to a wholesale business model in the UK and Benelux and the additional marketing and legal investments we outlined in our year-end call.

There are also the nine new retail stores that were not open during the first quarter last year and additional increases in variable expenses for the increased sales.

Operating income for the quarter was $28.2 million, or 13.8% of sales, compared to operating income of $28.8 million, or 18.5% of sales last year.

Our effective income tax rate was 30%, down from 37.2% in the first quarter of 2010, primarily due to a higher mix of our international business forecasted for 2011.

Net income for the first quarter of 2011 was $19.2 million, compared to net income of $17.9 million in the first quarter of 2010, and diluted earnings per share was $0.49 versus diluted earnings per share of $0.46 in the first quarter of last year.

Please note that all share and per-share amounts discussed in this call, including the amounts from prior periods, take into account the 3 for 1 stock split in the form of a stock dividend that was distributed in July 2010.

Turning to the balance sheet.

At March 31, 2011, our overall inventories increased 55.6% to $107.1 million versus $68.8 million a year ago.

By division, UGG inventory rose 55% to $68.9 million, Teva inventory increased 63.9% at $30.7 million and our other brands inventory increased by $1.9 million to $7.5 million at March 31, 2011.

The increase in UGG and Teva inventories was primarily attributable to a larger spring 2011 assortment for the UGG brand, the growth in spring orders for both brands, the warehousing of spring 2011 inventory supporting the new wholesale European business that was previously fulfilled by international distributors, and nine additional retail stores compared to a year ago.

In addition, at March 31, 2011, we had cash and cash equivalents totaling $437.9 million, up 22.5% compared to $357.3 million at March 31, 2010.

Accounts receivable at March 31, 2011 were $78.2 million, compared to $54.6 million at March 31, 2010.

The increase was attributed to increased sales, lower reserves for bad debt, and lower reserves for discounts.

During the quarter, we did not repurchase any shares under the current share repurchase program.

We have approximately $20 million remaining to authorized under the program.

Now moving on to our outlook.

Based on better-than-expected first quarter results for the UGG brand, partially offset by the reduced outlook for our developing brands, we are raising our 2011 guidance.

We now expect 2011 revenues to increase approximately 21% over 2010 levels up from the previous guidance of approximately 20% growth.

For the full year, we now expect UGG brand sales to increase by approximately 21%, up from our previous expectation of 19%.

We still expect Teva sales into increase in the low-20% range.

Combined sales of our other brands are now expected to increase approximately 5%, down from our previous expectation for an increase in the low-20%-range.

The lower outlook is primarily attributed to lower European and e-commerce expectations for the Simple brand, combined with supply chain constraints for Tsubo and Anu.

We currently expect diluted earnings per share to increase approximately 13% over 2010, up from our previous guidance of approximately 10% growth.

Our forecast is based on a full year gross profits margin of approximately 51% and SG&A as a percentage of sales of approximately 29%.

Compared to 2010, our effective tax rate is expected to decline to approximately 32% in 2011, driven by the increased mix of international profits.

As a reminder, our SG&A projection includes certain initial charges related to our transition to a wholesale business model in the UK, Benelux, and France, as well as additional investments in several key areas of the business that we feel are important to the long-term development and growth of the Company.

These include approximately $8 million of initial costs related to our transition to a wholesale business and the UK, Benelux, and France, approximately $11 million of additional marketing and advertising spend to support the UGG brand's men and women prospect initiatives, and a $10 million increase in our legal expenses to further fund the protection of our intellectual property and trademarks.

The aforementioned investments total approximately $0.50 per diluted share.

For the second quarter 2011, the shift to the third and fourth quarter of the distributor equivalent of $50 million of business, or approximately $0.25 per share, has a significant impact on this year's Q2 results.

Therefore we currently expect revenues to increase approximately 4% compared to the second quarter in 2010, and we expect to report a diluted loss per share for the second quarter of 2011 of approximately $0.25.

In addition to the impact from that aforementioned revenue shift, we are absorbing the fixed overhead for our new UK, Benelux, and France direct subsidiaries during the weakest quarter for wholesale.

In addition, the second quarter of 2011 includes additional fixed overhead from new retail stores that were not open during the second quarter of 2010 and other general administrative costs.

Also the second quarter guidance includes roughly $4 million related to our European transition to a wholesale business model, approximately $1.5 million of increased legal spend to defend our intellectual property and about $2 million of increased marketing spend.

These investments total about $0.13 per diluted share, without the impact of the revenue shift and these investments we would be guiding for earnings in the second quarter of 2011 closer to the Q2 2010 earnings.

I'll now turn the call back over to Angel

Thanks, Tom.

We're pleased with our recent performance and we continue to be optimistic about our growth opportunities during the remainder of the year.

Based on current sell-though trends and the result of our fall pre-book, we expect our global momentum to continue.

While we project product costs to be up approximately 10% over 2010, with the majority of the increase coming during the back-half of the year, we have several things currently working in our favor.

We were able to raise some prices, thanks to the strength of the UGG and Teva brand.

We increased prices between 5% and 10% on several UGG styles for fall and will be doing the same with Teva for spring 2012.

Furthermore, the conversion of the wholesale business in the UK and Benelux is positively impacted margins, as is the continued growth of our consumer direct business.

We're also working closing with our manufacturers and suppliers to find other ways to find other ways to help offset the continued rise in commodity prices, mainly sheepskin.

This includes exploring new footwear materials and new production technologies, as well as production capabilities outside of China.

In addition, we continue to focus on our long-term operating margins, and over time believe we can realize additional cost savings in our supply chain, including freight and warehousing, and further diversification of our product line in the to lessen our dependence on prime twin-faced sheepskin.

In the fourth quarter of 2010, 17 of the top 30 best-selling women's styles, and 24 of the top 30 mens' styles contain no or little sheepskin.

To close, I would just say that we're very pleased with our first quarter performance.

Our business is much bigger than it was a few years ago, and is more complex than it was just a few months ago.

I'm very proud of how our entire team has executed.

We're all set and very well set up for a very good 2011, despite -- especially in the back-half, when the majority of our sales and profits are generated.

Operator, we're now ready to take questions.

(Operator Instructions) Jeff Klinefelter with Piper Jaffray

Yes, thank you.

Just a couple questions.

One on the domestic side.

Angel, if you could talk about that, or give more specifics on the growth of the UGG brand, what did it grow in the wholesale channel domestically versus the retail contribution?

If I missed that earlier, I apologize, but just curious on that trend.

And then also any color on the sales balance, new styles, what they represented, versus kind of existing just to get a sense of category expansion.

And then just one international question for you, and that's I think you mentioned that basics were selling in pretty well, and you will work toward more of a broad-based assortment being received by international accounts.

If you could just clarify that a little bit more?

Thank you.

Let me start with the last question.

Internationally, especially in the UK, the business was driven by classic.

So when we say basic, it really is -- it has been classic business.

If you put yourself in the distributor's position, introducing new styles outside of that classic look of the brand was a risk to them, and they knew they were transitioning out.

So we really have become very aggressive in developing the brand, certainly the spring collection especially, around the new styles that have been performing well here.

you'll see that as an ongoing basis to be a bigger and bigger part of the mix in the UK, certainly the sell-throughs are.

Despite the economy in the UK, we're pretty satisfied with for doing there.

We're going to be transitioning to a broader-base assortment much like we did here, which includes the knits and the sneakers and the sandals on the UGG brands.

The other question on the sales --

Jeff, on the domestic wholesale business for UGG we had a solid quarter from that perspective.

And the whole domestic wholesale business for UGG was up 16% relative to the prior year.

And in terms of the sales blend, Jeff, as a basic strategy, we've been holding the growth of classic pretty flat to the total.

And the goal there has been to continue to spread and assortment of new styles, mens', women's, and kids' on a year-round basis.

We've been pretty successful with that.

You're going to see us offering a much more diversified product line.

Even in the fall season, you'll see a lot more cold weather products, and again the mens' initiative is very important.

We have had great response to the mens' fall line and we anticipate it performing well at retail.

So it continues to evolve as a total complete brand and four seasons a year.

Okay.

Just one clarification on the international, didn't Zohar mention that there was some delayed shipments?

Was that an aspect or a performance of the Q1 performance?

Jeff, there were some delay, as we mentioned, in both UGG and Teva, and that caused for some of the shipment -- I mean of the shifting from Q1 to Q2 of sales.

Okay, so retailers delaying from Q1 to Q2

Well it's shipping from our factories to our distribution, and therefore from us to the retailers.

Okay, thank you very much

Thank you

Sam Poser with Sterne Agee.

Good afternoon.

Tom, what amount of SG&A got was for the transition costs in the first quarter for the wholesale transition

The wholesale transition in the first quarter, I've got that.

Hang on a minute.

In the first quarter, for the wholesale transition, it was approximately $4 million to $5 million.

So about $4.5 million and then the balance is happening in the next quarter, in Q2?

Well with some of that is, in the second quarter there will be -- yes, roughly, yes the balance will be in the second quarter.

It was more planned in the first quarter but some of that shift in the delayed shipments, that moved more to the second quarter.

So you're right, the other half is in the second quarter

And then what is your -- I'm sorry, what is your -- how are you looking at the gross margin in Q2 and the SG&A in Q2 here?

Because I'm having trouble just even getting near the negative $0.25, I'm just -- if you could help a little bit that would be great.

On the gross margin for the second quarter, it is really going to be similar to last year.

And what sort of drives that is we obviously get a benefit on, now that we're direct in the Benelux and the UK, and that has more than offset the tough comparison that we had relative to a large duty refunds last year.

So you get really net-net for the second quarter, a similar gross margin to last year.

And so why aren't you seeing more benefits there?

Just out of curiosity

Well there is more what we talked about in the second quarter, the second quarter is till a relatively low quarter for that business.

A lot of that activity is in the third and fourth quarter for the UK and the Benelux business.

Spring's still relatively weaker relative the fall business, so that's why there's not as much lift in the second quarter

Okay, I'll get back on the queue.

Thank you

Mitch Kummetz with Robert Baird.

Yes, thanks.

Tom, just getting back to the guidance, just following up on Sam's question.

So what is the SG&A guidance on the second quarter?

Typically you guys give both gross margin and SG&A, at least you at have historically, so.

Right.

On the gross margin, we talked about similar to last year at 44%.

And really looking at the SG&A line in the second quarter, it's going to be up sequentially, slightly relative to the first quarter.

Maybe roughly 5% relative to the first quarter, which when you look at that on a year-over-year basis, it's pretty significant.

The nine new stores, now you have operating expenses and transition costs for the UK and the Benelux .

So all little bit of volume increases there as

That's understandable.

And then on the -- you guys are talking about a $50 million shift out of Q2 into the back-half based on that European transition.

First of all, I just want to make sure that's correct, right?

Yes, that's right, So that is the distributor adjustment equivalent of business that we'll now have in the back-half of the year.

Whereas a year ago, the fall product, the first wave of fall product, for the back-half of the year when we were going through distributor was in the second quarter

So you're saying, again just to be clear, you're saying that is a direct equivalent of what the distributor business was?

So you pick-up --

What I'm saying is in the third quarter, now we have a wholesale business there and I adjusted wholesale revenues to what the distributor equivalent revenues would be

Okay.

It was actually higher revenues now that we're on a wholesale business in the third and fourth quarters.

Got it.

So could you give us a little help as to how you -- how does that $50 million, which then ramps up to a direct business, how does that flow into the third and fourth quarters?

Is it concentrated more in Q3?

Just so that we get the numbers right as we're looking forward

Most of it is Q3.

There are some now, with the wholesale business there's also shipments in the fourth quarter, so most of that is in the third quarter.

Okay, so what does that $50 million look like in the back-half now that it's transitioned?

You mean --?

Is a like $70 million or $80 million or --?

On a wholesale basis it is close to approximately $75 million.

Okay.

All right, that's very helpful.

And then maybe just two last things.

One, again just to be clear, on the SG&A in the first quarter, I know you mentioned like $4 million to $5 million was based on the European transition.

How much of the -- it was up $25 million year-over-year, how much of that was also due to marketing and legal and the fact that you have more stores in the mix?

Could you break out those pieces

Yes, the retail side is roughly $5 million, the litigation, and there's some timing there, we thought it would be about $2 million, it was roughly a little bit over $1million, and marketing was approximately $1 million, $1.5 1,000,000 million, as well.

Okay, that's great.

Actually, I'll just get back in the queue.

Thanks.= and good luck

Jim Duffy with Stifel Nicolaus.

Thanks, good afternoon.

So if I understood you correctly, the UK stores under performed due to some operational issues.

Is there a way you can isolate the drag to the same-store sales from the under performance of the UK stores?

Yes, Jim, we broke -- when you take the UK stores out of the equation for the quarter, our same-store increase was 14.3%.

Okay, that's very helpful

Yes, good double-digit, strong double-digit comps in the quarter

Okay, great.

And then related question.

Can you quantify the impact of the delayed shipments to the gross margin in the first quarter?

Because that UK businesses is higher margin business, correct?

Yes, the UK business is a little bit higher margin.

It did have some -- a slight negative impact, because we did talk about that relative to -- we did fill in the business on the domestic side.

But it's a small -- in the scheme of things, it's a relatively small impact

Okay.

And then, Angel, maybe a question for you, as you look your fall order book for the UGG brand, can you speak to the factors and some of the styles that are driving the growth?

Is there any way to quantify the incremental contribution you're getting from mens' growth?

While we haven't broken that out, but if you just look at our mens' business, it's still small in comparison to total.

We're seeing a lot of interest and great bookings on the cold weather products, boots like the Rockville, which is a motorcycle style built on a weather-friendly mid sole/outsole.

Quite a lot of product has Vibram outsoles, non-slip, a lot of the product is smooth leather was sheepskin lining versus suede on the outside and sheepskin prime twin-faced on the outside.

So whereas historically, our mens' business had been driven by slippers and classic mens' styles, like in the ultra-tight boot for example, now we are seeing a transition to more what I might call sort of traditional boot styles, but with the UGG twist of sheepskin and comfort.

And the response has been, as I said, in the bookings has been very strong

Okay, great.

And then Steve Murray I think is going to be a great addition to the team, congratulations on that hire.

As you look to the UK/Benelux infrastructure and management talent there, what are some of gaps that you still have, or do you feel like you have everything in place, it's just a matter of getting at all working together?

Well, you can appreciate this.

Effective January 1, we flipped the switch on our UK business and absorbed over 100 people, absorbing a fairly complex chunk of business, and might have correlated to, in a business that's growing over that's like this, changing a car --p I mean changing the tire on a car that is still moving.

So it has been a test of our operational capabilities.

I think our team's done a wonderful job.

We've assimilated the new teams, Zohar's been over there since the first of the year.

So our intention is to really hand over to Steve an organization that is primed for growth.

The core team that's been in the UK for the last few years has done a fantastic job, butt the business is expanding and growing in complexity.

The e-commerce component of it, the retail component of it, the multi-channel distribution component of it.

So all of these things have been a real test of how well we operate, and I think we're passing the test quite well.

I think results line up supporting that over the next few quarters.

Okay, and then if you could isolate just a few of the operational things that caused missteps during the quarter, it would be helpful if you could highlight for us what some of those were?

Well, I don't really want to get too specific.

I mean we did make some Management changes on the retail side, And that obviously creates a loss of momentum if you will.

I mean when you have to change some Management out.

This is as much as anything a learning curve for our new team.

And so it has been an aggressive learning curve as well.

So as you can imagine things aren't always going to operate as effectively and as smoothly when you're combining a new team on top of a new business on top of a growth market.

And so those are the things that we've sort of managed through.

There are lots of little things.

I can't -- it's hard for me to point to any one real big thing, there really aren't any one real big things.

These are as much as anything, I would almost call them growing pains.

So it's a challenge were facing.

I'm really happy with the way it's going.

But you never quite know what you're taking on until you just dive right into it and start sorting it all out, and that's what we're doing.

Okay, thank you, and good luck

Thank you

Next we'll hear from Chris Svezia with Susquehanna Financial Group

Good afternoon, everyone.

I guess my first question, just to -- not to beat a dead horse to death here, but just on the disruption that occurred to a degree happened both on the wholesale and retail level within the UK in the quarter.

At this point, tom, as you sit here today, are you in a better situation, or have most of those situations been rectified?

Shipments are now flowing?

Just curious an update of where you stand today right now

Yes, Chris, as I indicated, this is Zohar.

We feel that most of the situations that we've been dealing with has been rectified.

As Angel said, we've made some -- we had to make some Management changes.

Some of the other issues that we were facing is a delay in delivery of products that now are flowing and we're delivering it to our retailers.

And just as Angel was saying, part of the learning curve, as Angel indicated.

Over a year ago we had about 100 people, now we have about 250 people.

All have to learn new system, convert, you're taking basically three distributors, we combined the Teva and the UGG distributors in the Benelux, put them together, and in the UK we have to establish a whole new team and teach them our way of doing things and converting them to our system.

So we feel very comfortable with that.

.As to the question about the Management.

Also I think Steve Murray is joining us in May, is going to be a great addition.

Also we have two major additions to Management ,one of them is in the Benelux suite in March, we hired Rob van der Vis, who came to us, he was running Dockers Europe, and he's a great addition to the team and putting the Benelux team together.

And in July, we have a new Managing Director for the UK market, Nick Vance, who was the Commercial Director from Radley Handbag Corporation.

So we really have a solid Management team and the infrastructure in place to meet our expectations for the year.

Okay, thanks.

And then just on -- I have a Teva question, for you , Angel, I guess as you think about, I hate to play the weather part to a degree, but just the performance in the first quarter, and your still comfort level with doing mid- to upper-20% growth for the year.

How should we think about that?

Is that anticipation for strong reorders in the second quarter, or is it just building for that fall closed-toe business that you've talk so much about.

Just talk about the context of how we think about this Teva business

We'll I'll just tell you the way I think about it.

Over all those many years I've been here, I got very tired of just waiting for good weather to hit exactly what we needed it.

So I really don't place -- I don't t really have a lot of expectation for exactly the right weather at the right time So my bullishness is really based on the combination of the new product that is taking share, and this is new product in more sandalized more open footwear, we're taking share from our competitors in that category, that's number one.

Number two we have closed-toe product in the spring that's performing quite well, which is important, and that helps offset any weather issues, the slow to start to the spring or unseasonably wet weather.

And then on top of that, there is the fall closed-toed product, which I've been just really surprised, and really pleasantly surprised, by the reception we've had from retailers, and the place they hold Teva in as an authentic outdoor brand.

We have plenty of opportunity based on performance last fall with light hikers to significantly change our business profile on a 12-month basis.

And so those are -- that's kind of the way I look at it.

Now on top of that, if we get fantastic hot weather for a couple months here, we're going to have much better-than-expected reorders.

So okay, I'll take it, that's a great thing.

But I can't bank on that

Right.

But that better expected reorders is not really in that fall process, normalized reorders, but not better-than-expected reorders.

Okay.

Last question I have is just on the transition, just so I have this correct.

Tom, when you talked about $50 million is the distributor equivalent at a wholesale level, and then you threw out a $75 million number, I'm just curious between the two of them, I thought it was initially $50 million?

Does that $75 million include some growth in the back-half as you broaden assortments of UGG or build up Teva business, etc.

I don't understand the two numbers

The $50 million is where you take a wholesale number of approximately $70 million to $75 million and adjust back to what it would have been at a distributor level.

Okay.

So then by definition, there is some growth, organic growth, as well if you were to look back at last year's second quarter

So the $75 million takes into consideration some of that growth, correct?

Yes it does.

All right

Its growth as well as the change in the model.

No, it's both.

I got you.

Okay.

Thank you very much and best of luck

Thank you.

Taposh Bari with Jefferies.

Hey, guys.

Just a question for Tom.

Can you quantify the UGG 42% growth in the first quarter how much of that came from the international transition, as well as timing, whether it was out of the fourth quarter?

Yes.

I'm trying to figure out -- go ahead.

Right.

I'm sorry, it keeps breaking up a little bit.

In the first quarter, the first quarter is a relatively low quarter still, but there is roughly about $5 million to $6 million of that growth in the first quarter, was related to just the change in model.

Okay, that's great.

And then the other question I have was on the first-quarter gross margin.

Can you just clarify how much it came below your internal plan, and if you could just repeat, was at all driven by mix from international mix?

No, not all of it.

So it was internally we thought we would be at approximately 51%, we came in at the 50%, a small amount of that was some lower margins on the other brands.

Some of it was mix-related too, not shipping the same level in Europe because of the delays we talked about, but made up for it on the domestic side.

So those are the two biggest drivers.

A little bit more relative, internal expectations, relative to the retail and e-commerce sections of our business, as well

Okay, great.

The last question I have is for Angel, can you just -- I'd like to get your thoughts on the Simple/Anu/Tsubo portfolio -- or part of the portfolio, how do you deal about the trajectory of those brands?

And I guess the reason performance change your views on a potential acquisition down the road?

Well I think the headwinds that Anu and Tsubo particularly were facing had to do a supply chain, with factories relocating to the middle of China, and the delays that were part of that.

It was difficult for any brand not doing volume, including brands that we own that are part of our factory structure.

They lost capacity, and when you lose capacity the small brands get hammered.

I think that's an issue for the entire industry y .

Good news on that front, we seem to be back on track.

Placing product in a much more diverse factory base, consolidating product lines focusing our attention a little better.

On the Simple side, we consolidated the Management team under Teva.

As you recall, middle of last year.

That I think we're going to anticipate great response to the new product line they've put together.

It is really not a new product line, it's a culled product line.

It's back to the focus and the roots of Simple.

I've always said that that brand has potential as one of the important players in the sneaker business, I'm talking the vulcanized, basic sneaker business, the Converse Chuck Taylor and the Vans business.

I think we, in particular that particular case, drank a little bit too much of the green Kool-Aid, perhaps, and the product stopped being attractive and comfortable and started being mostly green as a priority.

We're off that.

The product looks a lot better and retailers will vote with their wallets, and that's what I'm expecting.

We'll see what kind of we get.

We feel pretty good about what we're looking at.

Sales meetings are coming up in May, they'll be out selling the season immediately after that and time will tell.

As far as acquisition goes, clearly there is opportunity in the marketplace, we continue to look for the right brand that will fit into our total brand portfolio, and we've seen some pretty good things over the last couple of years that we've been pretty aggressively looking, it seems like maybe longer than that, but we have been.

And we will zero in on the right acquisition.

I'm feeling pretty confident about that.

But we're not -- we're going be selective, I guess.

It's important to be picky right now.

It's important to get something that really has great lifestyle potentially globally, and when we find that will be very aggressive in getting that

Okay, thanks a lot

Thank you.

Howard Tubin with RBC Capital Markets.

Thanks, guys.

Maybe just a question on inventory.

Where do you think it will be, Tom, at the end of the second quarter in terms of increase versus last year?

Yes, Howard, with the additional retail stores and now a wholesale business in Europe, we do expect it to be up at the end of the second quarter.

Is could be anywhere, it could be $150 million, $160 million up, to give you a point of reference -- not up, but in total at the end of the second quarter.

Got it, thanks.

And then I know you guys have a lot on your plate, internationally speaking, but any new markets or new countries on the horizon for the second half of this year or next year?

Well, obviously we've made some investments in Japan.

I still consider that a new market.

I think we're just getting our act together there, building a great team, we have a great presence.

The new Ginza store is absolutely beautiful, it's as beautiful our Madison Avenue store, in that market loves UGGs.

So we anticipate that business to continue to develop very nicely.

Just looking at China, that continues to be an important market and an important growth market for the brand, for UGG, for Teva, as well.

That retail base that we have there is performing quite well and we're building a solid team, so that's key.

Korea is a very important market.

We really are focusing on the Korean market as a place the brand can grow significantly.

It is a -- there is a lot of demand for UGG in Korea.

There are a lot of similar kinds of products being sold, but the consumer indicates that they want the authentic UGG Australia brand.

So those are opportunities that were looking at that we can execute well against, that we've got a team in place to exploit.

T said, if I were to look at Europe, France is a big market, France is a big opportunity.

When we acquired the Benelux, that allowed us now to give us a focus to France, and we anticipate that Steve Murray well be creating some great opportunities for all the brands in France, where we really have no presence.

It's a really void in our European mix.

Okay, thanks.

Thank you.

Bob Drbul from Barclays Capital.

Hi, this is Jessica Schoen on for Bob.

I had two questions.

I know you just were talking about China, I was wondering if you could give any more detail on how things are trending there, where you see that opportunity going?

And than the other question I have is that as you take over the business in Europe, if there's been any change in your distribution, as far as which stores you're targeting or how that works there?

Let me first China.

China, as I said before, China is one of those opportunities that, if you're not disciplined, you would pour all of your available investment dollar into China, as people have done in other industries.

And it's a monster, it's a huge market with great potential for this brand, tremendous consumer response, great performance in our stores.

That continues to happen.

We see it as a market for Teva, as well.

That's an emerging outdoor market.

The consumer now has a couple of things they had did have a few years ago.

Number one, they've got access to the outdoors and roads, which create access opportunities, vehicles, cars, in which to get there and more free time to exploit the outdoor activities.

So you are starting to see an emerging outdoor industry in China that was not there five years ago.

And the young consumer in China wants to discover their country, no different that people did here when they got a car and realized they could drive to the Grand Canyon.

So we're going to see that as an evolving outdoor market and I think the Teva brand I think will be well-positioned to take advantage of that.

What was the other part of the question?

About distribution in Europe.

Distribution in Europe.

One of the things that we've really done here is that we've been very disciplined about the UGG brand especially.

We've really wanted retail partners, people who would focus the brand and bring it to life the way that it we envision it.

We're just implementing that same strategy in Europe.

In that mix that's happened here a few years ago, you unfortunately have to what I call unsell people.

You have to stop doing business with certain customers because they're either unwilling or unable to continue to have the same brand vision you have.

We're doing that.

The good news is that is not a significant number of customers.

Most people are willing to accept the brand vision we have and move toward it with us and become a full partner.

And so I'm pretty excited about the direction that's going in, and you'll see it as time goes on in shop-in-shops and the spread and assortment of product in every country in Europe will expand significantly as it did here.

All right, thank you very much.

Thank you.

Thank you

Rob Wilson with Tiburon Research.

Yes, thank you.

Did the recent decision from the European Union -- or European Commission to lower their duties on Chinese footwear, does that change your margin expectations in the UK or total Company this year?

No.

This is Zohar.

It doesn't impact us significantly because the bulk of our products were really exempt from the duty that was until March of this year, so it's not impacting us.

Why were your products exempt?

They had different certain categories, and for example sheepskin was not part of that.

What they were trying to do when they had this duty was really to protect whatever left from manufacturing and sorting of shoes in Europe, and it had to do mainly with brown shoes, with leather shoes

That's helpful.

And, Tom, in your 10-K there's a disclosure where you say that you're going to make total payments to distributors of approximately $12 million this year.

Could you tell us what those payments represent?

That is related to the two -- so I'll summarize that.

AMG and Radical, and its related to not only the transition cost to those distributors, but also -- and then I believe there is one more in this year where payments relative to the former distributor in the Benelux relative to the Teva business.

So the three of those together aggregate the payments to the distributor.

Okay, so that's -- what does that represent?

Transition services, or did you buy them out?

We didn't buy them out, we let those contracts expire, so what that represents are payments really for the smooth transition of the distribution to our direct model.

Some of it includes order books, some of it includes customer lists, some of it is also includes some of the fixed asset, i.e.

some of the inventory and some of the leasehold improvements and fixed assets related to the facilities that we acquired.

Okay.

One final question.

On your capital expenditure, has that expectation of $55 million to $60 million changed?

And could you give us a sense of what that was in Q1?

Yes, it has not changed, so we still feel that that range of $55 million to $60 million still holds up.

And Q1 is a relatively small quarter, it was only about $5 million in Q1.

Okay, well thanks for taking my questions.

Thank you

Follow-up from Sam Poser.

Hello again.

I just wanted to understand on the -- as you are breaking out the gross margin.

I mean you had lower gross margin due to a greater amount of business than you expected in the United States than in your international markets?

Is that simply it?

And a lot of that was caused by the shortfall in the comps in the British stores?

That is, Sam, our US wholesale business has a lower gross margins than the European wholesale business.

So when we had some shortfall we described relative to not hitting some delayed shipments in the first quarter on that wholesale business.

So we had increase demand for our domestic business in the first quarter, so that does carry a slightly lower margin than the European business.

So that puts some drag on the margin for the quarter.

Got you.

Right.

But I mean, I would assume that the margins in your retail operations in the UK run at significantly higher margins than your wholesale operations there, if I'm not mistaken

Yes, but we did have -- we pointed out that the UK business on the stores was down year-over-year.

That's what I'm saying, that would be --

That contributes to some pressure on the margin relative to the forecast as well.

Could you break out -- could you give us the puts and takes there?

I think there is a lot of puts and takes.

I'll try to summarize it for you.

Because we were up on the domestic side of the retail, as well.

So that net-net, you look at the retail business roughly adding maybe 50 to 100 basis points, and then the take is the mix side I described, a little bit lower margin on the other brands that I had talked about, as well as in Europe that mix that I talk to you about We also had in Europe some good strong distributor sales in the countries that we still operate through a distributor with, and that has a little bit of drag on the margin, as well.

Does that summarize it for you?

I guess so.

And then lastly -- thank you.

Lastly, when we look ahead to Q3, I mean you're giving de facto guidance ion the revenue.

Can you give us the overall increase that you are currently looking for in the third quarter at this time, as you look at it just within the scope of the 21% net sales increase with all the shifting?

Because in fact, when you shift the $50 million, is that including the increase that you're expecting?

So for instance, if it's a $30 million distributor business, it would turn into a $50 million -- I'm just picking numbers, $50 million subsidiary business without any increase whatsoever, or you including an increase on an apples-to-apples increase in that $50 million?

Just to make sure we're on the same page on that.

The $50 million is the distributor-adjusted wholesale number, so the equivalent wholesale number is $70 million to $75 million, which includes growth and also includes the change in model that we talked about.

Most of that $70 million to $75 million would be in the third quarter, so the third quarter does get some good benefit of growth.

So are looking at -- we're likely looking at a 25%-- at least a 25% to 30%, somewhere in that range increase, overall apples all in the third quarter right now.

Well you've got to go through your model and look at not only the international side, but the domestic side and what assumptions you have for when we open new stores and what you have for the e-commerce and the domestic business and see what you come up with.

But the third quarter is really a strong quarter now that we've got a change in model there.

And you should have also a good amount of goods that move from Q3 to Q4, looking ahead as well?

Yes, the old distributor model, we'd shelf to ship product for fall in Q3, so they'd have a quarter to process it for Q4, so you would have that as well.

Some of those markets have different reorder rates relative to the US, so you're right.

To answer your question, correct, there is some of that going on, as well.

And given all of the product that you have rolling right now, and a lot of the new product is, I know you mentioned the new product that you're going to be selling into that market, you -- that's sort of the unknown at the moment on how well the cold weather and some of the newer styles are going to be received outside of the classics.

And that could just fill it quite a lot.

We know that they were well-received on sell-in, but to install new, we don't know what the sell-through is going to be in what the reorder will be.

So that's a an unknown, that's an upside.

I hope so.

Anyway, good luck.

Thank you.

Thanks.

And that is all the time that we have for questions today.

I'll turn the conference back over to Management for any additional or closing comments

Thank you, all.

I really appreciate your participating in the call.

Let me just again the Deckers worldwide team.

A lot of midnight oil being burned all over the world to ensure that we continue on the growth path we've been on over the last few years, and a lot of new talent brought on.

I think I'm most excited by that, and we'll be going around the world and meeting all of these new people.

And I do know they're a very enthusiastic bunch and highly motivated and great experience.

So let's all look forward to big things from this new, in a sense, it's almost like a new Deckers.

It is much bigger, much more sophisticated, and I believe much stronger Deckers worldwide.

Thank you all very much.

Ladies and gentleman, that does conclude today's conference.

Thank you for your participation.