Deckers Outdoor Corp (DECK) 2011 Q2 法說會逐字稿

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

Welcome to the Deckers Outdoor Corporation Second 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 questions.

(Operator Instructions) I would like to remind everyone that this call 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 this call regarding our expectations, beliefs, and views about our future financial performance are forward-looking statements within the meaning of the Federal Securities laws.

These forward-looking statements are intended to qualify for the Safe Harbor from liability established by the Private Securities and 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 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 Factors section of its annual report on Form 10K and its other documents filed with the SEC.

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

The Company undertakes no obligation to publically 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, sir.

Thank you, Operator, and thank you, everyone, for joining us today.

With me on the call are Chief Operating Officers ZoharZivand Chief Financial Officer Tom George.

We're pleased with our overall results for the second quarter, particularly given the recent changes to our business model overseas.

As a reminder, Q2 has historically been our lowest volume sales quarter and this year it was even more pronounced with our conversion of wholesale operations in our two largest international markets, the UK and Benelux.

We also added 11 more Company-owned stores during the past 12 months as we accelerate the expansion of our retail division.

Therefore, as we are carrying a lot of inventory, a lot of additional subsidiary and store expenses, expenses this quarter without the full sales benefit, we should come during the back half of the year.

While Tom will review the financials in more detail, our second quarter sales growth of 12.5% reflect the impact from approximately $30 million in UGG brand sales to our UK and Benelux distributers last year that will shift out and be recognized as wholesale sales in the third quarter of this year.

Second quarter sales of $154 million were approximately $11 million above plan which helped to offset some of the additional expenses and reported loss per share that was better than projected.

We witnessed growth in our domestic and international wholesale and consumer direct channels driven by demand for the UGG and Teva brands.

It's important to highlight that a good deal of the growth we experienced in the second quarter and year to date has come from new products introduced in 2011 or within the past few years.

For the Teva brand, growth included a much larger collection of closed toe footwear.

The expansion of closed toe footwear has been a key initiative as we have worked to move the brand beyond its roots in sports sandals and capture a larger share of the much broader outdoor market.

Consumer adoption of our new styles continues to be very encouraging, underscoring our belief that the Teva brand has the strength and consumer loyalty to extend itself into other categories such as light hiking and multisport footwear.

The percentage of this spring's sales, closed toe footwear made up 12% versus just 6% for the same period in 2010.

These results indicate that we have the product and position to successfully compete against some of the more established players in the space.

In addition to creating new growth opportunity, the expansion of our closed toe offering has further reduced the Teva brand's dependence on weather.

That was certainly evident this year as wet and cold conditions across much of the US during April and May delayed the start of sandal season and significantly impacted the level of reorders that we typically experience later in the quarter.

Despite this shortfall in our open toed business, Teva sales still increased 29.1% in the second quarter compared to the same period last year, primarily due to an increase in the number of non-sandal pairs sold as well as an increase in the average wholesale price per pair.

Outside the US, the Teva brand is in the process of graduating from a traditional sandal brand to an open and closed toe action outdoor brand with an increased appeal to younger outdoor adrenalin sports enthusiasts.

This spring, distributers purchased a greater percentage of new styles than a year ago and retailers in the UK, Benelux, and France to whom we now sell directly are dedicating more shelf space to the brand.

Overall we're very pleased with the Teva brand's first half performance.

The business is now more balanced from a product standpoint and we anticipate that the geographic mix will also become more balanced over the next few years as we further benefit from our new international wholesale operations, see growth through our current distributers, and open new markets in Europe, Asia, South and Central America.

The UGG brand's performance during the second quarter was driven by a 29.4 sales increase in our domestic wholesale business, increased shipments of fall product to our international distributers in regions where we continue with the distributer model and same store sales increase of 23.6% from our retail division and the addition of 11 new stores since a year ago.

This was our sixth season selling a true spring line for the UGG brand.

In a relatively short period of time, our team has introduced some very compelling footwear collections which initially were complementary to our spring boot business but they're now representing a meaningful portion of spring sales.

These collections which include sandals, clogs, and sneakers, help push UGG brand's second quarter sales above $100 million for the second consecutive year.

This was particularly rewarding in light of the shift to our wholesale operations in Europe.

The past several months have been a very productive period.

We successfully executive our spring plan and have been busy preparing for the second half of the year when we expect to generate more than 90% of our profits.

Specifically, we completed a very solid fall pre-book process, shipped initial fall orders to our international distributers and select domestic accounts, solidified our wholesale infrastructure in the UK, Benelux, and France, strengthened our international management team, and prepared for our busiest store opening period ever.

We also added an exciting new growth vehicle with our acquisition of substantially all of the net assets of the Sanuk brand which closed on July 1 and we'll discuss shortly.

For the second half of the year we currently project sales to increase 28% and diluted earnings per share to be up 32%.

While a portion of this growth is dated by our transition of wholesale operations in the UK, Benelux, and France, plus the addition of the Sanuk brand, the majority of the organic growth that is being fueled by the selling, marketing, and product strategies that we've put in place to support our brands.

The UGG brand is poised for an exceptionally strong second half.

Our broadest product assortment ever pre-booked very well, led by several non-traditional collections, including equestrian, wood bottom, cold weather, and sneakers.

We also received a positive response to the UGG collection, our first solo step in the world of high fashion.

Handcrafted in Italy, the UGG collection embodies the essence of rugged luxury and offers existing customers the ability to go deeper into the product while giving prospects an entirely new pathway into the brand.

At the same time we brought depth to the men's line, providing male consumers more options than ever before.

In support of our new sneakers, rugged and cold weather boots and slippers, we've developed a strategic men's only marketing campaign headlined by Tom Brady.

This multifaceted campaign which kicks off September 1 includes digital video, digital display, print, television, billboards, social media marketing, and dedicated PR.

The next few months will be an exciting period in the UK and Europe.

On the immediate financial benefit from transitioning to a wholesale business, there's also a big opportunity to grow the business by moving the UGG brand beyond its position as primarily a boot brand and establishing it as a year round luxury comfort brand.

Our strategy will mirror what we've done in the US.

We'll work closely with key wholesale partners that carry merchandise, a much broader product assortment and utilize compelling imagery in our marketing campaigns in our stores and on our websites to highlight the lifestyle nature of the brand.

The initial results have been encouraging with retailers taking a more diverse offering for fall 2011, focusing more on fashion, including our wood bottom collection, equestrian, metropolitan, knit, and cold weather, as well as classics and slippers.

As we previously announced, Steve Murray came onboard June 1 as president of Europe, Middle East, and Africa.

Steve bring valuable experience and critical leadership to our international operations and I'm very confident that he and his team are well prepared to successfully execute our plans in those regions.

Another integral component of our current growth strategy is retail expansion.

We ended 2010 with 27 Company-owned stores and opened an additional three stores earlier this year.

In the second half of this year we planned to add 14 more locations, including four in China, five in Japan, one in the UK, and the remaining four in North America, specifically Vancouver, Toronto, Boston, and Santa Monica.

The final piece I'll touch on and this is more related to 2012 and beyond is our acquisition of the Sanuk brand.

The Sanuk brand has tremendous potential and it's a great fit our organization from a strategic, financial, cultural, and operational point of view.

First, excluding deal fees, the acquisition is slightly accretive in year one, even with the seasonality of the brand's business.

The following figures related to the Sanuk brand are unaudited.

In 2010, the Sanuk brand reported sales of approximately $48 million, gross margins of approximately 54%, and operating margins of approximately 25%.

The Sanuk brand generated about 56% of its sales in the first half of the year.

For 2011, Sanuk brand sales for the first half were approximately $43 million, a 57% increase over 2010.

Tom will discuss the financial impact on the back half of the year but this gives you a sense of the contribution that Sanuk brand will provide in the future and why we're so excited to own this business.

Secondly, the Sanuk brand is complementary with our current portfolio.

While there was some overlap with the Simple brand and this played a small part in our decision to shut down that brand, it does not compete directly with any of our other brands.

It has established a unique market position through the combination original and innovative product design and authentic and irreverent marketing campaigns.

Most importantly we think the Sanuk brand has the potential to develop into a true lifestyle brand.

Next, the Sanuk brand brings with it a management team that shares our philosophy, our vision, our approach, and discipline.

We look forward to looking together and with our new team to build on momentum they've created.

This deal is also about diversification.

Diversification in terms of distribution, seasonality, and consumers.

With this acquisition we gain entry in the action sports channel in a meaningful way as the Sanuk brand enjoys significant market share and loyalty from hundreds of independent specialty surf and skate shops across the US.

We'll look to leverage these retail relationships in order to create new opportunities for some of our current brands while taking advantage of our size and resources to selectively penetrate our diverse account base of department stores, outdoor retailers, specialty stores, and independent shops.

With a product offering that is primarily lightweight casual footwear and sandals, the majority of Sanuk brand sales and earnings are generated in the first half of the year.

This acquisition, along with the resurgence of our Teva brand and the evolution of the UGG brand's spring line will help to further reduce the seasonality of our business.

And in terms of consumers, the Sanuk brand has a loyal following of young action sports enthusiasts and that's a market that we haven't really been able to go after until now.

Lastly, this acquisition is about creating long-term growth.

We believe the potential exists to expand the Sanuk brand's business by first leveraging key wholesale relationships to expand shelf space, extending product lines and introducing addition categories to attract new consumers, developing existing and opening new international markets, developing retail stores and increasing marketing and advertising to build awareness and generate demand.

Regarding input costs, we continue to work closely with our manufacturers and suppliers to address the continued rise in commodity costs with for Deckers is primarily sheepskin.

At the same time we're focused on additional cost savings in our supply chain as well as continuing our product diversification efforts.

I'll now turn over the call to Tom George, our CFO.

Thanks, Angel.

In the second quarter of 2011, net sales increased 12.5% to $154.2 million from $137.1 million in the second quarter of last year.

Net sales of UGG brand products increased 8% to $108.3 million from $100.2 million in the second quarter last year.

As a reminder, approximately $30 million of UGG distributer sales to the UK and Benelux from the second quarter of 2010 will ship up and be recognized as wholesale sales in the third quarter this year.

Net sales of Teva brand products increased 29.1% to $40.3 million in the second quarter from $31.2 million in the same period of 2010.

Combined net sales of the Company's other brands were $5.7 million in the second quarter of 2011 compared to $5.6 million a year ago.

Included in these brand sales number were global retail store sales of $20.1 million, up 102.2% from $10 million in the second quarter of 2010.

This was driven by 11 new stores and same store sales increase of 23.6% for those stores that were open for the full three month period ending June 30, 2010 and 2011.

Sales for our global ecommerce business which are included in brand sales numbers as well increased 10.3% to $5.7 million in the second quarter, up by $0.2 million in the prior year.

Also included in the brands sales numbers, domestic sales for all brands increased 26.9% to $82.8 million from $65.2 million in the second quarter of last year and international sales were $71.5 million, flat with a year ago in spite of the aforementioned shift in UGG revenues, underscoring the growth we experienced in our other European countries.

Gross margin for the second quarter of 2011 was 42.7% compared to 44.3% in the year ago period.

The decline was attributable to large duty refunds in the second quarter of 2010 as well as the approximate 10% increase in product costs as a result of higher production and commodity prices for all brands that we outlined at the start of the year and increased close outs and inventory provisions to the Simple brand in the current year.

This was partially offset by increased margins associated with a higher mix of retail sales in the second quarter of this year.

Regarding SG&A, SG&A expense for the quarter was $76.7 million or 49.7% of net sales compared to $47.5 million or 34.7% of net sales a year ago.

SG&A increased primarily due to initial transition costs and ongoing operating expenses related to our conversion to a wholesale business model in the UK and Benelux of $3.7 million.

Additional market investments we outlined on our year end call of $3.4 million and legal investments of $1.3 million.

There were also 11 new retail stores that were not open during the second quarter last year and additional increases in variable expenses for the increased sales.

In addition we incurred approximately $600,000 and approximately $800,000 of transaction costs for the Sanuk transaction in Q1 and Q2 respectively.

Our operating loss for the quarter was $10.8 million, $3 million less than our prior expected loss, compared to operating income of $13.2 million last year.

Due to the loss, we recognize and income tax benefit for the $3.2 million compared to income tax expense of $4.8 million in the second quarter of 2010.

Net loss in the second quarter 2011 was $7.3 million compared to net income of $8.9 million in the second quarter of 2010 and diluted loss per share was $0.19 versus diluted earnings per share of $0.23 in the second quarter of last year.

Turning to the balance sheet, inventories at June 30, 2011 were $210 million compared to $120.5 million at June 30, 2010.

By segment UGG increased $74.9 million to $178.7 million.

Teva inventory increased $11 million to $22.3 million and our other brands inventory increase $3.6 million to $9 million at June 30, 2011.

The increase in inventory at June 30, 2011 was primarily attributable to the growth in fall orders for the UGG brand, the warehouse of fall 2011 inventory supporting the new wholesale European business that was previously fulfilled by international distributers and the increase in retail stores compared to a year ago.

The increases in inventory support our forecasted increase in sales.

For example, global sales in the back half of 2011 are expected to increase over $160 million or approximately 24% over 2010.

Regarding Teva and other brands inventory, factory capacity constraints requires us to order key styles early which carry over to future seasons.

As of June 30, 2011, we had cash and cash equivalents totaling $325.2 million compared to $333.7 million at June 30, 2010.

Our cash position at the end of the year's second quarter does not reflect cash payments of $126.6 million associated with the acquisition of substantially all the assets related to the Sanuk brand that closed on July 1, 2011.

The slight decrease in cash and cash equivalents versus a year ago was primarily attributable to the increased inventories in receivables associated with the transition to wholesale operations in Europe.

Accounts receivable at June 30, 2011 were $107 million compared to $81.6 million at June 30, 2010.

The increase was attributable to increased sales, lower reserves for bad debt, lower reserves for discounts, and the conversions from distributer models to wholesale business models in certain European markets.

During the quarter we repurchased approximately 245,000 shares of Deckers common stock for approximately $20 million under our share repurchase program which completes this program.

Now, moving on to our outlook, based on better than expected second quarter results and improved outlook, we are raising our fiscal 2011 guidance.

Please note that this guidance takes into account our acquisition of Sanuk brand that closed on July 1, 2011.

We now expect 2011 revenues to increase approximately 26% over 2010 levels up from our previous guidance of approximately 21% growth.

For the full year we now expect UGG brand sales to increase by approximately 25%, up from our previous expectation of 21%.

We still expect Teva sales to increase in the low 20% range and sales of our other brands to be flat to 2010.

And for the Sanuk brand, we expect sales for the second half of the year to be in the low $20 million range.

We currently expect fiscal 2011 diluted earnings per share to increase approximately 17% over 2010 levels, up from our previous guidance of approximately 13% growth.

Our forecast is based on a full year gross profit margin between 50% and 51% compared to our prior guidance of approximately 51%.

We are taking a slightly more cautious approach to full year gross margins due to the Q2 margin results and the new variables that are associated with our international wholesale operations.

Our forecast is also based on SG&A as a percentage of sales of approximately 29% compared to 2010.

Our effective tax rate is expected to decline to approximately 31% in 2011 driven by the increased mix of international profits.

Our capital expenditures in 2011 are still expected to be approximately $55 million to $60 million.

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

These include approximately $9 million of initial costs related to our transition to a wholesale business model in the UK, Benelux, and France.

Most of these costs we expensed during the first and second quarters and are now behind us.

Approximately $11 million of additional marketing and advertising spend is to support the UGG brand men's and women's prospect initiatives.

About $3.5 million of this was spent in the first half of the year and the remaining $7.5 million will be split between Q3 and Q4.

A $10 million increase in our legal expenses to further fund the protection of our intellectual property including our trademarks, approximately $2.4 million of this costs were incurred in the first half and approximately $7.6 million are expected for the second half of the year.

In addition we now have approximately $4.5 million in due diligence, audit, and transaction fees associated with our acquisition of the Sanuk brand.

The aforementioned investments, due diligence costs, and deal fees total approximately $0.60 or $0.28 for the first half and $0.32 for the second half of the year per diluted share.

For the third quarter of 2011, we currently expect revenues to increase approximately 38% and diluted earnings per share to increase approximately 22% compared to the third quarter of last year.

To reiterate, we expect that approximately $30 million of UGG brand sales to distributers in the UK and Benelux and second quarter last year will ship out and be recognized as wholesale sales in the third quarter this year.

Wholesale sales in the UK, Benelux, and France in the third quarter are projected to be approximately $70 million to $75 million which is equivalent of approximately $50 million on a distributed basis.

It's also important to note that approximately $30 million of UGG brand sales to distributers in the third quarter last year will ship out this year and be recognized as wholesale sales in the fourth quarter.

Third quarter diluted earnings per share guidance includes approximately $10 million or $0.18 per share of incremental investments associated with additional marketing and advertising spend, the increase in our legal expenses, as well as due diligence, audit, and transaction fees for the Sanuk transaction.

Fourth quarter 2011, we expect revenues to increase approximately 22% and diluted earnings per share to increase approximately 36% compared to the fourth quarter of last year.

The guidance includes approximately $8 million or $0.14 per diluted share of incremental investments associated with the additional marketing and advertising spend and an increase in our legal expenses.

Operator, we're now ready to take questions.

(Operator Instructions) Our first question comes from Bob Drbul with Barclays Capital.

Hi.

Good afternoon.

The first question I have is on the gross margin guidance, can you elaborate a little bit more in terms of the more conservative posture, especially on the direct side.

Just trying to understand where the increased risk stems from at this point.

What we're considering there is it's new markets, new direct markets, large amount of revenue growth we expect in the back half of the year and you'd have to address new customer relationships, you have to address currencies.

You're throwing estimates relative to discounts, return rates, reorder rates, and all that.

We think at this point in time, it would be appropriate to just be a little bit more cautious there relative to where we were.

We were really -- the approximate 51%.

We were within the bounds of reason related to 51% anyway and it really just boils down to really just basis point differences there relative to where we were.

In the second quarter, that -- albeit a small quarter, not a significant quarter, it does impact the total year and we can get into some more detail on that but one of the things that brought down the second quarter gross margin was the Simple brand where we did some write downs of some inventories and prepared that and that's probably the one other thing.

I can get into more detail in second quarter but I don't know if you want me to get into that right now, Bob?

I would definitely be interested in that.

In the second quarter there were a lot of puts and takes as well but one of the other things to remind everybody of, we did have cost increases this year that we outlined at the start of the year.

That puts some pressure not only on the total year guidance but also the -- which we knew at the start of the year, but relative to 2010, the cost increase pressure is like 130 basis points relative to 2010 in the second quarter.

On the other side, we've got a big lift relative to more retail sales.

That's about 140 basis points, Simple -- preparing Simple, that was about 60 basis points.

And then remember we had a real tough comparison to the second quarter last year where we had about 230 basis points of lift relative to duties and then one more thing to consider for all the puts and takes is now that we're direct internationally, we do have a lift in the UK and Benelux.

It was about 120 basis points.

So, if you track all those through, that explains the pressure in the second quarter of about 160 basis points.

Got it.

Okay.

And just a couple more questions.

On the comps this quarter, can you give us the UK comp and sort of where the delta was?

When you look at the nice acceleration on the comps from Q1 to Q2, any call outs you would highlight?

We did some significant improvement in the UK comps.

We saw really strong improvement really in the US comps as well and so that's pretty much what drove that.

Obviously very pleased.

We ended up at 23.6% comps for the quarter, up from just about 3% first quarter.

We're really pleased with the turnaround we're seeing there, especially on the UK side.

Right.

And then just one last question that I have, Tom.

On the UGG business for the fall in terms of the order book, how did you guys end up with the outerwear and accessory category for the UGG business?

I'll turn that one over to Angel.

Yes.

One thing to understand about our outerwear and accessories business, first of all, our accessories business, the hats and gloves, is a licensed business and they've had some nice gains.

We've been performing very well but it's licensing.

You can see form the distribution we have penetrating more top end retailers and a great assortment of product.

On the outerwear, that's been product that is primarily driven to balance out the mix in our stores.

We're really focusing on that entire concept at the moment to make sure we understand what a consumer wants from UGG in terms of apparel including outerwear.

The best place to discover that is in our stores.

We have some limited wholesale distribution of that product which is performing quite well.

I don't feel it's a complete line yet.

I don't feel that we have learned everything we need to learn about the appropriate seasonality and the waits for the sheepskin for outerwear, et cetera.

That's a work in progress.

You'll see more of that as our stores evolve and more of the mix in the store is apparel.

Great.

Thanks very much.

We'll go next to Jeff Klinefelter with Piper Jaffray.

Yes.

Thank you, guys.

Just a few questions for you.

First of all, Tom, maybe we can just clarify this shift math for the UGG business.

You think about $30 million of distributer shipments come out of Q2 and into Q3.

Then you talk about that being approximately $50 million, truing up to $70 million or $75 million in traditional wholesale shipments.

Are we suggesting that on a year over year basis, you're seeing growth off of what would've been $30 million and it's an equivalent of $50 million today?

Yes, Jeff.

That's right.

That $30 million has moved to $50 million with some organic growth there and then that converts at a wholesale basis to $70 million to $75 million.

So, yes, we are.

We're really pleased so far, where we're at there.

That's very meaningful year over year growth for that market.

Is that coming from an expansion of some doors?

Is that an expansion of floor space?

Can you give a little bit more color on that?

Yes, Jeff.

This is Angel.

I think what you'll see as time goes on is the same type of improved spread and assortment of styles that we had here in the US a few years ago as you may remember.

We were primarily classics and slipper driven for the bulk of our business.

As we took over the UK business, it appears that the focus was a little too dominant on classic in that market as well.

So, the team's done a great job in balancing the spread and assortment of stores.

We're starting to see a much better representation of the brand across the multiple styles that we have and I think that's certainly leading to an improved sell in and a more interested and enthusiastic consumer.

Okay.

That's great.

We expect sales to be improved by that too.

That's great.

Thank you.

Just a couple other quick things.

Sanuk, up 57% year over year in the first half.

Anything you could add to that?

What's driving that?

Again is it distribution?

Is it expanded assortment?

That's pretty impressive growth year over year.

Now you know why we wanted to buy the brand.

I'm not sure why you wanted to sell it.

It's a brand that's really on the launching pad.

Growth for them is just enthusiasm, excitement over the product line.

They've expanded into some nice categories.

The balance is 50-50 men to women.

There is really a great momentum and energy around that brand in the action sports and surf market.

So, we anticipate that with what we bring to the party, we should be able to help them achieve a 40% full year growth which is -- it's a nice round number, it's a good indicator of the kind of momentum that they have.

So, that -- just to clarify, that's not necessary pure organic growth in the same doors.

There's been some expansion of assortment to get to that kind of a growth rate.

Oh, yes.

They have been doing that.

They're getting demand from independent specialty, they're getting demand from the department stores.

Dillard's is doing a great job with them and so, yes, they've already begun the process but obviously we're going to add some gasoline to the fire so to speak.

Thank you.

Just one last thing quickly.

On Teva, Angel, you mentioned clothes.

I think you said this last period it was 12% versus 6% the prior year of the sales.

So, essentially doubling the penetration clothes.

What's your objective there?

Where do you see that going on a seasonal basis and an annual basis?

I don't really see any reason why clothes can't represent 50% of our seasonal -- our spring business.

And it really over time should be at least 40% of our total annual business.

Now, if you throw in the mix of product from Europe, you're going to see in Europe probably a bigger mix of closed toe to sandal product than a typical year only because of seasonal needs for waterproofing and weather product in Northern Europe.

We're addressing that with insulated product and waterproof product and that kind of thing.

Obviously that product is at a higher price point.

So, what we're seeing is the evolution of Teva exactly in the right direction as a lifestyle brand and I expect this type of shift to continue.

Do you have a general characteristic of the price difference percentage percentage-wise, closed toe versus non?

I mean, I'd say on average you're looking at probably a $20 at retail, more expensive product than sandalized product -- performance sandalized product.

You take a good performance sandal at $75, you're going to see closed toe product at about $95.

That's about the norm.

Thank you very much.

From Sterne, Agee we'll go next to Sam Poser.

Good afternoon.

With the Sanuk acquisition, Tom, you mentioned that there's the charge in the third quarter.

How much was that that you said was going to be in Q3 for the Sanuk number?

Sam, that's about $3.5 million is in the third quarter.

And there was how much of that -- ?

It was $4.5

That was in the first half of the year.

And you had 3.7 -- right.

Okay.

So, that makes sense.

And then so that's really the only -- those two are true onetime charges, correct?

Right.

The ones we outlined in the first two quarters and the third quarter, yes, those are true onetime charges associated with doing the deal.

And then could you break out what the Sanuk sales were by quarter in Q1 and Q2?

No.

We're not doing that.

Again, they're unaudited numbers at this point in time.

We gave you the frame of reference for growth for the full six months but I think giving you -- it's still at this point in time primarily a spring business.

You really want to look at the spring season, the first two quarters added together and compare that to the prior number and --

Is it pretty even between quarters?

Or is it more weighted to the second quarter, just given the kind of product it is?

It's fairly even.

It depends on the reorder rate, right?

It's a fairly even mix, a little bit skewed to the second quarter.

And then lastly, when you're looking at the overall business right now and the retail specifically, you added two more stores to your mix.

You're opening 17 this year, to the prior fleet of 50 as I understand.

Are you thinking that you can sustain that 20% growth?

And could you also talk about the timing of the other store openings?

The balance of 14 that are going to still open?

The balance of 14 will be in the fourth quarter, mostly the fourth quarter -- pretty much.

So, like two in Q3 and the balance in Q4 kind of thing?

Yes.

In terms of sustaining that kind of growth, it's really determined by locations, where -- which particular locations are available in the context of other appropriate brands for the UGG brand.

As I've always said, we are not in the business of replacing our wholesale business with retail stores.

These stores are an enhancement in environments where we feel the brand has enough momentum and energy and that a store would create some buzz around the new products.

That's exactly what happens.

People see our new products and the spread and assortment in our retail stores and it creates a real demand for that product at wholesale.

We're being very selective.

I think we could -- really if we wanted to we could accelerate the store growth rate more.

But we're being pretty methodical about that.

I'm going to continue on that path.

You also have to appreciate that operating stores is difficult and we are improving and perfecting our operating model.

It's gotten so much better than it was and I'm glad we didn't put pressure on ourselves by overly accelerating the store opening.

Then you take a look at the same idea and spread it out over the whole world.

You really need to have people capable in each region to operate the stores at the right level.

One last -- I'm sorry.

No.

As I said, we're just being methodical and probably a little bit cautious.

But I think that's okay.

Store openings over the next five years, how do you look at that?

Are you talking about having 150 stores globally you think?

We're thinking about 25 per year is about the right number once we hit our stride.

Thank you.

Continued success.

Thanks, Tom.

We'll go next to TaposhBari with Jefferies & Company.

Hi.

Good afternoon.

I was hoping, Angel, you can talk about the backlog and how that looks particularly for your classics business as we enter the second half?

Okay.

I mean, generally you may have noticed the last few years we really have been holding classic growth flat as a percentage of total.

And we've done that because that's really been the way in which we've been able to innovate around classic and create more spread and assortment of not only core classic styles and colors but products that we don't classify as classics but appeal to the same consumer and allow us to broaden the appeal to even younger customers as well.

So, classics, we'll continue with that same strategy.

For example, you don't see us marketing classics actually and that's a very interesting thing we do.

We market the new stuff.

It creates demand for classic.

And so classic is our core assortment.

It's the initial reason that retailers got excited about the UGG brand but what keeps consumers motivated about all of our new stuff is the style and the innovation and the function of the new product.

We'll keep doing that.

That's helpful.

Then I also wanted to ask if you could give us some more color.

I appreciate the US wholesale business data point earlier in the call.

It sounds like your US wholesale business has been up about 20% so far for the first half.

Can you give us a sense of how you're planning that business for the second half?

Yes.

We have some big comparisons in the second half of the year.

We have a lot of new initiatives, some good marketing programs in place.

Again, a lot bigger numbers to compare against in the second half of the year.

So, they're obviously not the same order of magnitude of growth that occurs in the first half.

Another thing's that going on in the second half, we have a big international business anywhere a lot more retail stores.

That's sort of some color on the second half of the year.

Also you know we've put the marketing initiatives we've talked about, particularly on the men's side.

We expect to see a nice blip in men's sell through in the fourth quarter, especially with Tom Brady, the marketing kicking off September 1 as I said.

New color waves, new styles, a whole new product.

It's really going to -- it's kind of hitting retail now and will over the next month.

It represents in some cases quite an expansion of the assortment.

So, we have high expectations for sell through on those new products and new customers coming into the fold.

Okay.

And just a final question I had.

Tom, I was hoping you could give us some more color around kind of the gross margin and SG&A seasonality between the third quarter and the fourth quarter.

Because it looks like there's some pretty meaningful margin headwinds in the third quarter and then some kind of relief in the fourth.

I was hoping you could give us more additional color on that.

Gross margin for the third and fourth quarter, we're really at this point in time looking at gross margin similar to the prior year.

We know this year relative to the prior year we've got the cost headwinds.

At the same time we've got the direct model in Europe as well as some more retail stores.

So, net-net, it should be similar to the third quarter and the fourth quarter of last year.

in terms of G&A growth, a lot more growth in the third quarter as we get prepared.

Those -- albeit most of the stores open in the fourth quarter.

There is the startup costs, so to speak, of preparing stores for the fourth quarter as well as though the cost in the third quarter.

There's also the Sanuk costs that are included in the third quarter we've talked about earlier in the call.

So, in terms of growth year over year, the SG&A is going to grow a lot higher percentage-wise in the third quarter than it will in the fourth quarter.

Okay.

Thanks a lot.

Best of luck.

Our next question comes from Mitch Kummetz with Robert Baird.

Thanks.

Tom, just to follow-up on that last question, I want to be clear.

So, on the gross margin side of Q3 and Q4, you're basically saying kind of flattish gross margin in the last year and SG&A more growth that in Q3 than Q4.

But can you say specifically how much of the SG&A growth in Q3 -- if you could give it as a percentage of sales or a dollar increase?

Maybe if you can tell us what the impact is from the European transition?

Because I would imagine with the sales increase that you're expecting, there would be some variable SG&A in terms of dollars that's tied to that?

Yes, Mitch.

To give you a little bit more color with what's going on in the third quarter compared to the prior year.

There's obviously the retail stores.

We talked about that.

On international, similar growth in SG&A in international when you consider not the transaction costs -- those were in the first half of the year.

But when you consider some international marketing.

We have now direct -- we have operating expenses in two large markets over there.

So, in total -- and we have Japan and Asia-Pacific.

We've been building up infrastructure there.

So, that growth is going to be similar to the retail stores.

And like you said, you've got some variable expenses.

And then there's the IP expenses we had in the third quarter and the fourth quarter as well.

The deal costs for Sanuk, most of the $3.5 million or $4 million, those are in the third quarter as well.

So, hopefully that gives you some clarity, a little bit more color on the third quarter.

That does.

And maybe on that last piece, segue to Sanuk, because you guys are -- your guidance on the year includes the acquisition costs on Sanuk, right?

That's right.

We only have the back half of the year of Sanuk revenues and operating expenses.

They're always half of the year, right?

They're primarily a spring business.

But we've got four quarters worth of costs because we've been working on this for awhile.

So, what is the impact on earnings?

It's dilutive to earnings as you're guiding, right?

What is that dilution?

And then what's the accretion if you take out the acquisition costs?

When you include the deal costs for the year, it's like $0.04 to $0.05 of dilution really in the third quarter.

When you back out the deal costs, really just the back half deal costs even, when you back that out, you're modestly accretive in the slowest time of the year for them, a couple cents.

Alright.

That's helpful.

Then on the inventory I know you went through by brand but can you say how much of the inventory increase is related to the European transition?

And could you also say if there's any excess in the inventory?

I know, Angel, you talked about some softness on the sandal side with Teva given the weather and I'm wondering if you guys were able to move inventory in the second quarter, if there's anything that gets carried over into Q3 that might be considered excess.

Yes.

Mitch, on the inventory I can give you that.

On the international side they had close to -- there's roughly a $50 million -- $50 million to $55 million increase relative to the prior year on the international side.

Because we run a distributer model that has very little inventory a year ago.

Some of the increases are at retail stores.

I think another thing to point out is the average unit costs throughout are close to 10% year over year.

So, you've got a good close to $20 million of the increase year over year is relative to the average unit cost.

I think a couple other points on inventory, Teva, albeit it's a good sized brand, in this day and age in terms of factory capacity, you've got to order key styles early on and bring those in early, which we have.

Those key styles do carry over in future periods.

I think another key point is if you look at what the inventory requirements that are implied, given our guidance for the back half of the year, you can see we're going to have to bring in more inventory to be able to handle the growth in UGG sales we're seeing in the back half.

There's no excess on the Teva side in inventory?

Spring excess?

No more than one would normally expect.

Keep in mind we're really sensitive to making sure what we put in the line can carry over as well.

Last question, on Simple, I know you guys -- where are you in the process of shutting that down?

I assume you built inventory for the back half.

Maybe I'm wrong about that.

And then given that you are shutting that brand down, what will that mean in terms of earnings impact next year?

I assume that business was losing money for you guys.

Yes.

This is Zohar.

As to the process that we indicated, we are going to phase it out by the end of the year.

So, we're not selling a spring '12.

Basically what we're doing is we're liquidating the inventory that we have and selling it in '11.

As to the second part of your question, in terms of the impact on earnings, that should be positive because you're right.

It has been dilutive to earnings.

But can you say how positive?

How negative is it on your guidance for this year?

When you look at our forecast for this year, I mean, albeit it's small but it's close to $2 million.

Alright.

Great.

Thanks, guys.

Good luck.

Your next question comes from Jim Duffy with Stifel Nicolaus.

Thanks.

Hello, everyone.

Thanks for all the detail in the prepared remarks.

Believe it or not I still have a few questions.

Related to Bob's question about the UK comps, did you indeed see a normalization of inventory flow in the UK and Benelux during 2Q?

Jim, your question there, is that relative to the wholesale business there?

Correct.

With some of the delivery issues you reported in the first quarter, did you indeed resolve those and see smooth operations during the second quarter?

Yes.

We did.

We're pleased with how that turned in the second quarter.

Really pleased how that went.

Great to hear.

And then a little more detail on the shift dynamic.

With the shift of $30 million from 3Q into 4Q, could we expect a similar growth rate and gross up into 4Q that you saw with the balance of the 2Q $30 million?

One thing you need to keep in mind there on that is the 4Q business is a heavily dependent reorder kind of business.

So, you have to be more cautious from an expectation and planning point of view there.

So, we haven't given any specific guidance on that.

It's still a little bit too early to tell on that.

Net-net I think it's safe to assume it's going to be lower than the third quarter impact.

Okay.

So, you'll see -- just to be clear, you'll see a gross up from the conversion of -- the elimination of the distributer discount.

You're not yet comfortable predicting what the growth rate of that would be?

I think that's the way to look at it.

There's a change in models.

You'll see a gross up, everything being equal.

But we're not at this point in time given it's so dependent on reorders.

We're not ready to go into detail what the magnitude of the volume increase may be.

Okay.

That makes a lot of sense.

And then with respect to the fourth quarter, is there anything that's going to be anniversaried in the fourth quarter from the UK Benelux distributer business?

My point being is the shift from 3Q a pure shift into 4Q over a clean balance or is there something else that goes away from 4Q a year ago?

Net-net there could be some more reorders to compare distributer versus wholesale.

But that's in the magnitude of things.

There's nothing really to get wrapped up about.

Okay.

Thanks.

And then, last question, you mentioned completing the buyback program.

What's the thought process on re-upping that?

When would the next opportunity for that be?

We're continuing to evaluate that.

When we're prepared to talk about that some more, we'll talk about that.

Okay.

Thanks for the help.

We'll go next to Chris Svezia with Susquehanna Financial Group.

Good afternoon, everyone.

Great job.

I guess, Tom, just to go back to just the prior question here, just on the fourth quarter potential shift, you are obviously assuming in your guidance that there is some shift of that revenue, some modest gross up but not obviously expecting anything significant at this point?

Is that just a fair assessment?

I think a better way to look at it is where obviously there's a change in model, there's going to be some growth from a unit point of view.

But because of the reorders, it's so dependent on reorders and it's still early at this point in time.

We're new to those markets on a direct basis.

We just want to be more cautious.

I think another point we made is net-net, at this point in time we're assuming it's going to be lower than the third quarter.

Right.

Okay.

On inventory, you went through a lot of moving parts there.

Very helpful.

But I'm just curious, as you go through the back half of the year, just any thoughts as you look at third quarter?

Could it still be up a similar amount?

I'm assuming coming out of second quarter when you guys reported these numbers you hadn't shipped a lot of product to your subsidiaries.

That was obviously on the books as well, correct?

Let me get one at a time.

On the third quarter, still given the sales projections we talked about earlier, there's still some more inventory to be brought in here and we also have by the end of the year 11 more stores and at least 11 more stores in play by the end of the year.

We're going to have some good inventory levels again by the end of the third quarter.

I'd say from a percentage-wise -- it's probably -- it could be percentage-wise close to the same kind of growth as we saw in the second quarter.

A little less.

Okay.

Then something you haven't talked about a little bit, can you give an update on your shop-in-shops in terms of how many you have, how many you expect to grow this year?

I think historically there's been a 30% or so pop when you guys put these in place.

Can you give some update on where you are with those?

Yes.

The shop-in-shops are really still tracking where we thought we would be at the end of last quarter but we currently have about 250 of those.

By the end of the year we think we'll have around 370 shop-in-shops.

Lastly, Angel, for you, when you think about what's going on with the UGG brand in the UK and Benelux, just sort of what you're seeing in the back half of this year, any way to characterize how much of that is just coming from growing in existing doors, how much of it is just possibly new doors.

I know you mentioned some new SKUs that are obviously getting placed.

I guess, just trying to draw parallels as to where you think that business is relative to maybe -- I don't know, seven years ago or so here in the US.

Is that sort of where you are right now at that business?

I'd say it's more like five or six years ago here.

Keep in mind we really just got the sales team together there.

They're -- this is really the first season that they're selling in the way that we sell here with the product spread and assortment.

We've refined our distribution mix there.

There have been some people that we're no longer going to be selling to because we really didn't like the direction the brand was taking in some of those stores.

So, they've got a long way to go.

I really feel that across the board, men's, women's, and kid's we've got a lot of work to do in the entire selling environment.

So, I would correlate it to UGG here when it was really hot as a classic boot.

They don't have slippers there, for example.

That's one of the big categories.

That's not going to develop a category there.

Cold weather has not been a developed category there.

Surf which has been a big category here.

We have a long way to go there.

I'm really anticipating a very robust selling effort ensuing the next couple of seasons.

Okay.

Helpful.

If I could ask just one thing, just any -- I know Kurt Geiger is a pretty important customer for you guys.

Any thoughts about just kind of the change in ownership?

They're looking to probably grow the chain in terms of what's going on there.

Any -- it used to be a pretty solid relationship for you guys.

Yes.

It's an excellent relationship.

I think what this does is allows us to do some more top to top planning with their management team.

And really leverage some resources that we both have toward building the brand.

So, we're pretty excited about it.

We think it's a great move.

And we already have a great relationship.

I anticipate it's just going to be more focused.

Now everybody's got a lot to gain from the UGG brand's success.

That's good to hear.

Best of luck to you guys.

Congratulations.

Thank you.

Our final question comes from Kelly Hauser with BB&T Capital.

Hi, guys.

This is Kelly calling in for Scott.

Just a question about your -- strategically with the Sanuk acquisition and your plans to expand to other retailers internationally?

Could you just give a little color around timing and how early you could see some of these initiatives playing out?

Could it be as early as spring '12?

The initiative, when you want to expand in different channels, a lot of times it requires a different product mix.

So, fall '12 is probably the most realistic opportunity for a brand new product that assesses the needs of a certain channel.

In terms of leveraging or expanding relationships, we already have.

We can begin that with spring '12.

We also see that there's an opportunity in expanding their women's business into department stores where we already have relationships.

They already have an excellent product line for women we think.

It just needs to get in front of more buyers as well as the independent specialty stores.

I think Sanuk is a brand that there's a lot of curiosity about and since they've been focused on action sports and surf, those sales calls have not been made at the level and in the quantity that I think you'll start to see.

So, there's a lot of low hanging fruit in what I would call the correct season and then as we have to develop product to address some of the new channels, that will expand into fall '12 and spring '13.

Okay.

In terms of new product or different distribution channels, do you see -- what are you looking at in terms of gross margin?

Would you see any pressure there?

Can you give us any color around that?

I think one of the things they're very good at is being innovative and inventive about how to make shoes.

They've got a great construction.

It's not a shoe.

It's a sandal, as I say.

And what makes it -- from a production point of view, it's made like a sandal.

Therefore it has some advantages from a cost and production basis.

We want to learn from them.

My goal would be to keep gross margins where they are with Sanuk.

They've learned some things as entrepreneurs and innovators that we can certainly benefit from.

Not to say that they won't also make some other product that might be at slightly lower margins because it's more conventional construction.

That's part of the mix.

But as we all know, sandal brands typically have a higher margin than closed toe brands and even their closed toe products are made like sandals.

There's a big advantage there.

Great.

Thank you.

Thank you.

Thank you, all, very much for joining us.

We are very satisfied with our results in the second quarter.

And we anticipate that the year will continue on the same positive trend and look forward to talking to you on next quarter's call.

We appreciate it.

Ladies and gentlemen, that does conclude today's presentation.

We thank you for your participation.