Deckers Outdoor Corp (DECK) 2011 Q3 法說會逐字稿

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

Welcome to the Deckers Outdoor Corporation third-quarter fiscal 2011 earnings conference.

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

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

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

(Operator Instructions)

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

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

Angel Martinez.

Please go ahead, sir.

Thanks for joining us today.

With me on the call, as always, are Zohar Ziv and Tom George.

I am going to begin with a review of the main drivers of our record third-quarter performance and then Tom will go through the numbers and outline our guidance.

I will then return and provide some commentary on the upcoming holiday season and our long-term outlook.

And after that we will be happy to take questions.

As you saw from our press release issued earlier, we had a great quarter.

Sales increased 49% to $414 million and diluted EPS increased 49% to $1.59, both third-quarter records for the Company.

Our recent performance was driven by strong demand for UGG brand across our multiple distribution channels and geographic regions.

From a product standpoint, sales were very broad-based for the UGG brand, consisting of multiple boot collections and a growing assortment of casual footwear.

This year's women's fall line is our most diverse ever.

Boots included equestrian, cold weather, fashion, Classics led by the Sparkle and the Bailey Button Triplet, and wood bottom styles.

Casuals included clogs, slippers, and sneakers which have all sold very well.

The introduction of our Italian handcrafted UGG collection was also well received.

Our men's business had a strong quarter too.

September was highlighted by the debut of our new ad campaign featuring Tom Brady.

In addition to the TV spot that first ran during the Patriots season opener on Monday Night Football, we targeted male customers through several mediums including print, billboards, kiosks, digital, and the Web.

We have recently seen a meaningful pickup in the demand for our expanded line of men's sneakers, casuals, boots, and slippers.

Our UGG brand domestic wholesale business increased double digits for the fourth consecutive quarter.

I think it's important to point out that the growth of our US wholesale business continues to come from higher door productivity versus new door growth.

Our strategy of keeping distribution tight and going after more shelf space within our account base of better department stores, specialty footwear retailers, and key independents is clearly working.

Through the ongoing evolution of our UGG line we have succeeded in significantly increasing the average SKU count per door over the past several years and now command more retail real estate, including more than 350 shop-in-shops.

In Europe, we have made good progress growing our wholesale business with distributors and, more recently, through our subsidiaries.

This quarter marked our first fall season selling directly to retailers in the UK.

Orders were up significantly on both a unit and dollar basis and were noticeably more diverse than a year ago.

The transition to a wholesale model has allowed us to capitalize on the demand generated by our former distributor and accelerate the UGG brand's evolution beyond its classic roots to establish it as a luxury comfort brand.

Much like we have been doing in the US, we have identified the right group of retailers to partner with us on this strategy and made the decision to narrow UK distribution.

Now this will help ensure that consumers are presented with a broader selection of merchandise, while also educating the population on just how deep the product line has become.

In the Benelux, we have picked up where our former distributor left off.

This market has been selling a diverse selection of product for several years and the retailer response to this fall's new introductions has been positive.

In our distributor markets, which include Italy, Germany, and Russia, to name a few, we experienced solid year-over-year growth in the third quarter driven by demand for multiple collections.

Overall, we are pleased with our performance in Europe.

We are obviously cognizant of the concerns about Europe due to the economic situations in several countries, and we will continue to closely monitor sell-through as we head into the holiday period.

We have also expanded our business in Asia through direct operations in Japan and our joint venture in China.

These are two of the largest luxury good markets in the world and provide compelling long-term opportunities for the UGG brand.

This is our third year of direct operations in Japan, and while the retail environment has been soft following the earthquake and tsunami in March, we are moving forward with the right mix of wholesale accounts in each of the major cities.

Expanding our company-owned retail locations has also been a key part of our Asia growth strategy.

We have opened five stores in Japan and four in China year-to-date.

These new stores include our first boutiques, which are smaller version of our full price concept stores, and average about 1,400 square feet.

On a global basis our Consumer Direct division delivered a very strong third quarter.

Retail sales increased 72% fueled by our aggressive store opening schedule in Asia coupled with very strong comps.

Same-store sales were up 15.4%, which follows a 23.6% increase in the second quarter and comes on top of a 17.9% comp increase in the third quarter of last year.

Our US stores again outperformed versus expectations, while our stores in the UK have continued to improve after a challenging first quarter.

It appears that the UK retail environment has stabilized following the implementation of austerity measures earlier in the year and our outlook for the holiday season remains positive.

Finally, our e-commerce business posted its fourth consecutive quarter of double-digit growth driven by higher UGG brand sales on both our US and UK websites.

I will now turn it over to Tom.

Thanks, Angel.

We had a great quarter.

In the third quarter of 2011 net sales increased 49.1% to $414.4 million versus $277.9 million in the third quarter of last year.

Net sales of UGG products increased 47.3% to $376.7 million versus $255.8 million in the third quarter last year.

Net sales of Teva products increased 7.3% to $14.7 million in the third quarter, compared to $13.7 million in the same period of 2010.

Sanuk brand sales were $15.6 million in the third quarter.

We began including the Sanuk brand's operations effective July 1, 2011, our acquisition date.

Combined net sales to the Company's other brands decreased 11.7% to $7.4 million in the third quarter 2011 compared to $8.4 million a year ago.

Included in these numbers are global retail store sales of $34.7 million, up 72.1% from $20.2 million in the third quarter of 2010 driven by 13 new stores since September 2010 and a same-store sales increase of 15.4% for those stores that were open for the full three-month periods ended September 30, 2010 and 2011.

Sales for our e-commerce business, which are included in the brand sales numbers as well, increased 18.3% to $10.3 million in the third quarter, up from $8.7 million in the prior-year period.

Also included in the brands' sales numbers, domestic sales for all brands increased 26% to $257.9 million compared to $204.7 million in the third quarter of last year.

And international sales increased 113.8% to $156.4 million compared to $73.2 million in Q3 2010.

International sales were 37.8% of total sales, up from 26.3% last year.

Gross margin for the current quarter improved 1.9 percentage points to 49% compared to 47.1% in the third quarter last year.

This increase was driven by direct distribution for the UGG brand in the UK and Benelux, an increased mix of retail sales, and is partially offset by a roughly 10% increase in product cost.

Total SG&A expense for the quarter was $112.2 million, or 27.1% of net sales, compared to $64.6 million, or 23.3% of net sales a year ago.

SG&A increased primarily due to an increase in operating expenses related to our conversion to a wholesale business model in the UK and Benelux and additional expenses of acquiring and operating the Sanuk brand.

In addition, third quarter 2011 SG&A includes additional marketing investments of $3.8 million; higher legal spend totaling $2.1 million; due diligence, audit, and transaction fees related to the Sanuk acquisition of $2.7 million; and $4.4 million in the amortization of intangible assets and purchase price accounting tied to the Sanuk earn-out payment.

The due diligence, audit, and transaction fees are one-time charges, while the amortization and earn-out accounting will be ongoing at decreasing annualized amounts.

There are also 13 new retail stores that were not open during the third quarter last year and additional increases in variable expenses for the increased sales.

Operating income for the quarter was $90.7 million, or 21.9% of sales, compared to operating income of $66.3 million, or 23.9% of sales, last year.

Net income for the third quarter 2011 increased 48.3% to $62.5 million compared to net income of $42.1 million in the third quarter of 2010.

And diluted earnings per share increased 48.6% to $1.59 versus $1.07 in the third quarter last year.

Now turning to the balance sheet, inventories at September 30, 2011, were $356.9 million compared to $197.3 million a year ago.

By segment, UGG inventory increased $143.7 million to $324 million, Teva inventory increased 50.4% to $16.9 million, and our other brands inventory increased by $1 million.

Sanuk inventory totaled $9.2 million at September 30, 2011.

The increase in inventory at September 30, 2011, is primarily attributable to the growth in fourth-quarter orders for the UGG brand, the warehousing of holiday inventory supporting the new wholesale European business that was previously fulfilled by international distributors, and the increase in retail stores compared to a year ago.

As of September 30, 2011, we had cash and cash equivalents totaling $90.4 million compared to $250.5 million at September 30, 2010.

The decrease in cash and cash equivalents versus a year ago was primarily attributable to the cash payment of $126.6 million associated with the acquisition of Sanuk brand on July 1, 2011, combined with the increased inventories and receivables associated with the transition to wholesale operations in Europe.

At September 30, 2011, we had $45 million in outstanding borrowings under our credit facility compared to none at the same point last year.

Accounts receivable at September 30, 2011, where $227.7 million compared to $142.2 million at September 30, 2010.

The increase was attributable to increased sales and the conversions from distributor models to wholesale business models in certain European markets.

Now moving on to our outlook.

Based on better-than-expected third-quarter results, we are raising our fiscal 2011 guidance.

We now expect 2011 revenues to increase approximately 33% over 2010 levels, up from our previous guidance of approximately 26% growth.

For the full year, we now expect UGG brand sales to increase by approximately 32%, up from our previous expectation of 25%.

We expect Teva sales to increase by approximately 20%.

For the Sanuk brand, we now expect sales for the second half of the year to be in the high-$20 million range versus our previous guidance in the low-$20 million range.

And sales of our other brands are expected to be down by approximately 10% compared to 2010.

We currently expect fiscal 2011 diluted earnings per share to increase approximately 22% over 2010 levels, up from our previous guidance of approximately 17% growth.

Our forecast is based on a full-year gross profit margin of approximately 50% and SG&A as a percentage of sales of approximately 29%.

As a reminder, our 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 and growth of the Company.

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

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

Approximately $11.5 million of additional marketing and advertising spend to support the UGG brand's men's and women's prospect initiatives.

Approximately $7.2 million of this has been spent year-to-date with the remaining $4.3 million budgeted for the fourth quarter.

A $7 million increase in our legal expense is to further fund the protection of our intellectual property, including our trademarks.

Approximately $4.5 million of these costs were incurred during the first nine months with $2.5 million remaining in the fourth quarter.

Lastly, we have approximately $4.1 million in due diligence audit and transaction fees associated with our acquisition of the Sanuk brand, most of which has been expensed during the first three quarters.

The aforementioned investments, due diligence costs, and deal fees total approximately $0.56 per diluted share.

In addition, we have approximately $4.9 million of amortization expense related to Sanuk brand intangible assets and approximately $2.8 million of accretion expense related to contingent payments for the acquisition of the Sanuk brand.

Of this total $4.4 million was expensed in the third quarter leaving $3.3 million to be expensed in the fourth quarter 2011.

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 expected to be approximately $60 million.

For the fourth quarter of 2011 we expect revenues to increase approximately 29% and diluted earnings per share to increase approximately 33% compared to the fourth quarter of last year.

This guidance includes approximately $6.9 million, or $0.12 per diluted share, of incremental investments associated with additional marketing and advertising spend and increased legal expenses.

We are still in the planning stages and budgeting process for next year, though consistent with past practice, we will provide more specific 2012 guidance when we report our Q4 results in February.

But we want to share with you some initial insights, particularly as it relates to raw materials.

Prices for our primary raw material, sheepskin, have continued to rise, as have leather prices which often moved in correlation with one another.

After increasing 30% in 2011 over 2010 our sheepskin costs will be up another 40% in 2012.

As we have discussed before, we have implemented programs to help mitigate the impact from higher sheepskin and raw material costs.

These include selectively raising prices, increasing the mix of non-sheepskin product, exploring new footwear materials, new production technologies, and US production, and supply chain efficiencies such as reduced freight costs and others.

We think some of these measures, along with the expected growth of our retail division and higher concentration of international sales, will help partially offset the increase in our cost of goods sold in the near term while others will take more time before we see meaningful benefit flow through our P&L.

With regard to SG&A expenses, we expect to make additional infrastructure investments, primarily personnel, to support our multichannel growth strategies in Europe and Asia next year and beyond as well as consider additional marketing expenses.

In addition, 2012 operating expenses will include the non-cash charges for Sanuk, amortization expense, and the earn-out accounting of approximately $12 million.

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

Thanks, Tom.

As you can see from our guidance, we are anticipating another strong fourth quarter.

The recent acceleration in sell-through of the UGG brand at retail combined with our inventory investments has us well-positioned for the holiday season in the US and in our direct international markets.

Earlier this month we opened two more stores in China, as well as locations in Toronto and Vancouver.

We will soon open our third store in London, followed by another two in Japan.

This will give us 44 stores worldwide by mid-November, up from 27 at this time a year ago with 19 in the US, five in the UK, 10 in China, eight in Japan and two in Canada.

So it's shaping up to be another record year for the Company.

The UGG brand is on pace to surpass $1 billion in annual sales.

The Teva brand is projected to report its second consecutive year of 20%-plus growth, and our brand portfolio has never been stronger thanks to the acquisition of the Sanuk brand.

At the same time we are in excellent financial condition with no long-term debt and a projected year-end cash position of approximately $250 million with no short-term bank borrowing, even after our purchase of the Sanuk brand, and approximately $20 million in company stock repurchases.

Turning to 2012, spring 2012 pre-book process for the UGG, Teva, and Sanuk brands went well.

The UGG brand Spring line is expected to have a much greater presence at our domestic wholesale accounts next year, including sandals, espadrilles, boots, clogs, and sneakers.

The mix of closed toe footwear now comprises approximately 21% of the Teva brand's spring line and will continue to be the driving force behind the brand's continued market share gains in the outdoor space.

The Sanuk brand was well into its spring selling period when we acquired it in July.

Management has made good progress growing the pre-book portion of the business and this is evident in their backlog at September 30.

Overseas the UGG brand spring line is still under-penetrated.

We believe that our newly established subsidiaries provide a stronger platform to go after this large market opportunity.

Likewise, our direct operations in the UK and Benelux are influencing the Teva brand's strategic direction in those regions as well as neighboring countries like France.

Turning to retail, our preliminary plans are to open approximately 25 new stores in 2012.

The majority will be in international locations, primarily boutiques in Asia, with a store opening cadence similar to this year.

Now we are obviously well aware of the potential headwinds that face the global consumer should the economic environment deteriorate further.

However, we feel good about our prospects and our growth prospects at this point.

The opportunities for our business have never been broader or more diverse, and we are confident that we have the right strategies in place to build on the global momentum that we have created.

So, operator, we are now ready to take questions.

(Operator Instructions) Jeff Klinefelter, Piper Jaffray.

Thank you very much.

Congratulations, everyone at the Deckers team, on a great performance.

Question for you first, Angel, on the UGG brand and pricing during the quarter and during the second half of the year.

Impressive gains.

I was just curious, either measured in your own retail doors or measured as you can tell through the wholesale channel, how much of this growth is coming from a positive mix shift in terms of your ability to deliver higher price point products within the mix, versus just unit velocity.

And then I was also curious just how much of the UGG growth the men's product did consider, given that it is coming off a small base.

The one follow-up question for Tom would be on the gross margin rate.

You talked about some puts and takes to the margin this year and some incremental costs next year.

How should we be thinking initial -- your rate all those things considered for next year?

Are we looking at a down margin, just given that you have already benefited from the integration of the distributors this year?

Okay, let me take the first part, Jeff.

Significant growth has come from the mix shift.

We have had great success with the extensions of the brand beyond the Classic category, which has been an important component of our strategy, diversifying the product line.

All you have to do is walk in the stores and see the kind of interest we have in non-classic product.

It's actually quite extraordinary.

Particularly the cold weather product, which has been very strong and the sneakers have continued to perform well even through the fall.

So it has been, I think, more slanted toward that mix shift; that is where we are seeing a lot of growth.

On the men's side, we are very happy with the results of the men's initiative.

We have had, I would say, very solid low double-digit sales gains on the men's side and the momentum continues to build.

I think we are just now seeing the weather begin to shift and the season for boots, and cold weather boots particularly, is starting to make itself known.

So I feel that we are building some nice momentum on the men's side.

Jeff, regarding margins, one thing we do know is now we know the increased raw material costs we expect to experience in 2012.

And I think another thing we know right now is, which is 2012, which is different than 2011, is we will not experience the same one-time lift we experienced in 2011 by going to these UK and the Benelux markets direct in 2011.

That benefit, for example, in the third quarter was an approximately 5% benefit to the margin by going direct.

So it's still early.

Another thing is it's still early in our planning process to be able to come up with really what the margins may be for 2011 because there are a lot of puts and takes.

We are still finalizing our pricing.

We are still finalizing for next year what our mix of international versus domestic business will be.

We are also evaluating and determining just what the number of retail stores, which can help with the margin next year.

So a little bit too early, sort of consistent with normal process, in February when we report our fourth-quarter results we will be able to have a better view of margin guidance for next year.

Okay.

What will your total cost of goods rate increase be this year, Tom?

That is a good question.

It is real similar to what it was in 2011.

In 2011, we hit about 10% with the total cost of goods increase, and for 2012 at this point in time it looks like it will be real similar.

Okay, great.

Thank you very much.

Good luck.

Mitch Kummetz, Robert W.

Baird.

Thank you.

I have got a few questions.

I will start on your Q4 guidance.

Obviously a lot of moving parts to the business this year, especially with Europe, but then also Sanuk and new stores.

Is there any way you can say what your organic growth rate assumption is in Q4 if you kind of strip out those incremental businesses?

Yes, that is a good -- I think you can get to that, yes, Mitch.

We talked about Sanuk being in the high $20-millions for the back half of the year.

In the first -- in the third quarter Sanuk was a little bit over $15 million of sales.

So if you strip that out of there from the growth rate that we are giving, then you can sort of back into what an organic growth rate would be.

And, Tom, on a last call you talked about a $30 million shift coming out of Q3 to Q4 because of Europe.

Is that still the case?

And if it is, or even if it isn't, what does that turn into for Q4 based on the conversion from distributors to direct?

Again, in Europe the fourth-quarter business is very much dependent on reorders as opposed to being re-booked like the US.

So we are being cautious relative to our expectations in the fourth quarter in Europe and the UK until we get through our first full season and get a better understanding what kind of reorder rates there may be.

Okay.

Then just a follow-up on Jeff's question about gross margin.

You guys are on pace on your international business; I mean that could be, I don't know, maybe close to $400 million this year.

Maybe a little less than that.

I know at one point you guys talked -- prior to this conversion you talked about I think the UK was about 40% of sales, Benelux 15%.

When it's all said and done today on international, what will those two markets represent as a percentage of your overall international sales?

Do you kind of have an idea of that at this point?

Let us get you that.

While you are thinking about that, can you speak a little bit to the growth that you are seeing in Japan and China, and how much that is contributing to the international?

Or is it pretty much all coming out of UK and Benelux?

Well, I will give you -- the Japan market as well as the Chinese market are still relatively small.

Sort of an estimate for the total year, the Japanese market is about 2% to 3% of sales while the Chinese market is about 2% of sales for the total year.

Okay.

And then maybe lastly -- if you can get me those numbers on UK and Benelux that would be great.

But, Angel, you refer to the spring pre-book; is there any way you could quantify that?

It sounds like the pre-book is coming in very strong, but is there maybe a number you could tie to that or a percentage increase?

No, I am not ready to do that at this point.

It has been strong consistent with what we have seen in years past.

With more penetration and more styles we are getting more real estate than we have had in the past, so the mix is very good.

We are very happy with the mix.

But I don't want to disclose any specific numbers at this point.

Mitch, on Europe let me give you a quick number available.

It's not just those two markets we are direct, but we have a good business in Germany and some of the other countries.

So the total European region is roughly 20% of total sales.

Okay.

All right, that is helpful.

All right, thanks, guys.

Good luck.

Bob Drbul, Barclays Capital.

This is [Jessica Schoen] on for Bob.

I had a question about the inventory.

I know you gave a little bit of detail about which brands contributed to the increase, but I was wondering if you could talk about the magnitude of the different buckets as far as whether it was coming from the Sanuk brand or the increase in demand for UGG, how those contributed to the overall increase.

Yes, I can do that.

Sanuk, let me put that out, that was about $9 million so a year ago we didn't have that in our numbers.

One of the big growth areas is internationally now that we are direct, and that was about $[60] million of the increase.

Then another increase is we have more stores that is $12 million to $15 million.

And the balance would be domestic.

Then something that really cuts across all that is there is about a, for the most part, a 10% increase in the cost of inventory levels to a year ago, the cost increases we experienced.

Okay.

And then as far as comps by region, I know you said that the UK, which had been trailing the US, had improved.

Is there anymore color you can give us on what comprised the 15.4% comp increase?

Generally speaking, the US was stronger than the international markets and that is probably level of visibility we want to give right now.

We had some improvement in the UK relative to what we saw earlier in the year, but we are seeing in Japan and even to a certain extent, a lesser extent, China some impact there.

But we still have a good outlook relative to Japan and China relative to the retail opportunity there.

Okay.

Then just finally on the outerwear and handbag business, if there is any comments you can make on that.

Yes, we really like the direction that we have taken with both of those businesses.

As you may know, we have been incubating both of these, moving away from the original license relationship that we had in both businesses to managing it and developing on our own.

I think this year, as you may have seen from the initial shipment of the handbags, we have made a dramatic improvement in the handbags.

The apparel line is a lot more focused with, I think, products that are priced right and make statements about the UGG brand.

Clearly, one of the advantages of having these retail stores is that we have a fantastic laboratory for experimentation and development of both the apparel and the accessories line.

Our team has been very good about identifying opportunities, putting them in the doors, and seeing how they perform and then accelerating the development from there.

So I would say we are probably still in that early-stage development of our apparel and accessories strategy.

And you will see more of that, and more acceleration in that, over the next couple of years.

Okay, thanks so much.

Jim Duffy, Stifel Nicolaus.

Thanks.

Nice third-quarter results.

Question, Tom, on the fourth-quarter guide.

Revenue going from 22% to 29% growth, but EPS growth guidance going the opposite direction from 36% to 33%.

Help me understand the disconnect there.

Yes, Jim, with some of that is there was some expenses in the third quarter that shifted to the fourth quarter.

In fact, most of the change in the earnings guidance is related to that.

There is also -- what we are seeing now for the fourth quarter is a little bit of a shift in mix, a little bit more of a movement towards the domestic business versus the international business, and that has some negative impact on the margin.

But net-net yet it's mostly due to a shift of expenses.

Okay.

And then, Angel, you have broadened the offering of UGG in the UK and Benelux.

Can you comment on the sell-through rates that you are seeing for the broadened UGG offering in UK and Benelux, and I guess for that matter other international markets?

Well, we -- and I can comment on sell-through rates for spring.

I think it's a little early at the moment to comment on the fall since the weather has been quite warm in the UK, especially all through Europe we really haven't seen real fall like weather consistently.

We have a ways to go with our spring product in Europe.

The brand was known as primarily a classic brand, UGG Classic synonymous with winter, and we have some work to do there.

I think sell-throughs were good but they could be better with a little more insight about the product and the assortment and the flow rate of those products and assortments.

And we learned.

This is only the first fall season that we have been selling product directly.

We have gone to school on last spring's product, which we did not sell-in.

That was sold in by our distributor.

So I think you will see improvement across that front next year.

It's a little early to comment on the fall.

We are getting good signals so far, good response to the initial shipments of product, but still too early.

Okay, that is helpful.

And then recognizing that your thoughts on 2012 are preliminary, if you were to exercise price increases, what would the timing of those be?

Would that be for the second half of the year?

Is it too late at this juncture to implement those for the first half?

It would be mostly the second half of the year.

It would be related to our fall business, which obviously is the lion's share of the business.

Okay, thank you.

Taposh Bari, Jefferies.

Congratulations.

I just wanted to follow up with you, Tom, on that fourth-quarter guidance question.

I am still a little, I guess, kind of confused about the offsets there.

So about a $25 million increase in your -- or $20 million increase in your revenue guidance.

I get around $0.15 of better EPS and the expense shift I think is around $0.02.

I am still trying to understand how you guys are guiding fourth quarter down versus your prior guide.

If you can kind of help bridge that gap a little bit better.

It may have been in terms of your model and some of your expectations, but our prior guidance was more like a $3.09 kind of guidance.

We are coming in now, if you apply the percentages, at roughly $3.02 and then $0.04 of that is relative to expense shift.

So it's primarily due to the expense shift.

Then the other thing is when you have a change in mix relative to what is international versus domestic then you also get some pressures on the margin relative to the prior guidance.

Got you.

So I guess the composition of that $555 million changes pretty meaningful then?

Yes (multiple speakers)

Sorry.

I wanted to ask also about the Sanuk charges.

So it sounds like last quarter you outlined about $4.9 million of transaction costs, which I believe were primarily in the third and second quarters, and now it sounds like there are an additional $10.5 million worth of various charges.

So were those originally in your third- and fourth-quarter guidance or are those new?

Can you, I guess, answer that first?

Those were originally in the third- and fourth-quarter guidance and at about those full amounts, just a little bit lower than in the original guidance and what we estimate those to be right now.

Those are still being evaluated at this point in time as well, but that is sort of where we are at now.

What I talked about for 2012 are the approximate numbers we expect at this point in time.

Okay, that is helpful.

Then just the final question that I had was just the cadence of your story openings this year.

I believe last quarter you said 12 in the third quarter and then -- I am sorry, two in the third quarter, 12 in the fourth.

It sounds like that has become more balanced.

Is that an accurate observation?

Yes, in terms of the fourth quarter this year we expect about seven of the 17 for the total year.

So we have balanced it out some more.

We have brought -- more of the store openings are coming sooner so we can capitalize more on the full fall season as opposed to just the fourth quarter.

All right.

And just the final point, on these new international stores that you are opening are the majority of them going to be these boutique kind of smaller square foot footprints types, or are they going to kind of vary?

Because I believe your US stores are closer to that 3,000, 4,000 square-foot prototype?

The boutique is more of an international concept, more of an Asian concept, but it won't be the majority.

Okay, thanks a lot.

Chris Svezia, Susquehanna Financial Group.

Good afternoon, everyone, and nice job.

I have a question just, Tom, for you.

In terms of the -- take a stab at all the assumptions you are making for fourth-quarter comp by any chance?

Are you assuming it slows in your guidance for the fourth quarter, just given the comparison and given your typical conservative stance?

Yes, on the fourth quarter, especially with the -- not only do we have new stores, but our stores, the comp base is still relatively small when you compare it to another larger retailer.

So we -- and the macro backdrop we see around the world.

We still try to be cautious from that point of view on what kind of assumptions we have put in for comps.

Okay.

So kind of the low to mid single-digit assumption, is that fair for the fourth quarter?

You go head and whatever assumption you want in there.

But another thing to keep in mind is now we have -- for instance, in New York we have three stores there now relative to earlier years.

So you need to -- especially with the macro backdrop, you need to be cautious where you take the comps.

Okay, fair enough.

I think, Angel, you mentioned $250 million in cash at year-end.

Did I catch that correctly?

That is right, yes.

And then I am curious just, Angel, if you can just maybe elaborate a little bit.

In the UK when you talk about kind of looking at your existing door count, where you are consolidating that door count, I guess how do we think about growth, I guess more importantly as you go into spring, because I guess most of it is kind of in the bag at this point for the fall?

But how do we think about that?

Is it mostly coming from units?

Is it coming from expansion of breadth of product, improved productivity existing doors?

Do you actually expect to increase door count at all going into the first half of next year in the UK?

No, actually we do not expect to increase door count.

We think growth will come from all of the above; it just depends on the channel.

There are some doors that are very heavily strictly Classic and very limited beyond that, which is not an appropriate representation of the UGG brand.

So it's kind of a one-dimensional view of the UGG brand.

So, therefore, clearly we want to expand beyond Classic, we want to expand into the spring, we want to expand into men's and kids.

So those are some doors.

Some other doors there is a relatively decent assortment, but there has been inconsistency in continuing to evolve the categories of product.

So there is only a spot representation of the classification of the product versus other areas.

So I will give you an example, slippers.

Slippers is a great growth opportunity in the UK.

It's starting to catch on, but we have not enough penetration of doors in the slipper business.

And that is coming; you will see more of that.

Men's is another area where we are just starting to see some acceptance and development of our men's casual and casual boots and cold weather product in the northern parts of Europe.

There we have a lot of room to grow.

So I would say, if nothing else, what we have in the UK is probably a few too many doors, frankly, and there might be some more consolidation and an underdevelopment of the assortment in those doors.

So our team over there has got their work cut out for them and they will be driving those growth objectives in the next 12 months pretty aggressively.

Okay.

And then on Sanuk, I remember last quarter you talked about it's a, on an annualized basis, 25% operating margin business.

Any reason to think as you go into spring of next year, which I assume seasonally it's a stronger operating margin than the annualized margin, that that would change dramatically, even if you make some investments in the business?

No, it shouldn't change dramatically, even making investments in the business.

And you are right, the front half of the year is what going to have stronger operating margins than the back half for Sanuk.

That is great to hear.

Then the last thing I just have here is when you talked about 2012 and you touched on some investments that you plan on making in staffing and marketing, I guess all-in everyone is looking at the level of expenses and sort of one-time break out legal, marketing, etc.

It's $0.56.

Is there any way to maybe think about is it the expenses and the acceleration next year?

Is there going to be anything close to that magnitude as you go into next year, or is things like expanding sales staff more normalized with the growth of the business?

I think the best way to look at this point in time it's still early in our planning process.

As we evaluate the number of retail stores we will open, we continue to evaluate what kind of personnel we need to be able to scale the Company internationally, in both Europe and Asia.

We continue through our planning process and get a better idea what the requirements are going to be we will be able to share that in February.

Okay.

All right.

Well, best of luck to you guys.

Christian Buss, Credit Suisse.

Congratulations on the nice quarter.

Was wondering if you could provide some perspective on the newly opened retail doors that you opened and their productivity right now?

How are you feeling relative to the historical model?

Sure.

We are very happy.

I think the doors that we have opened recently in the US particularly and Europe have been performing as to the plan.

Obviously, in Japan, they had a meltdown, a tsunami and that has been problematic.

Curiously, we are getting great performance from the outlet store we open there.

And the original store we had, which is a little hole in the wall, has been performing exceptionally well.

But tourism has been way down in the Ginza district and, curiously as well, tourism from China.

It's just now starting to bounce back.

The Chinese consumer in Japan is a very powerful driver of shopping in those districts, so we expect to see some improvement in the fourth quarter.

We are not immune to the macroeconomic situation across any part of the world.

Wherever you see a slowdown in general retail the odds are we are going to experience some less-than-stellar performance.

But having said that, I am constantly amazed at how well our stores perform because of the loyalty we have from consumers who really love the brand.

And so we expect that to continue with innovative product and more aggressive marketing in those retail locations.

Okay, thank you very much.

Could you also provide some perspective on your comfort with your inventory levels?

Yes, we are really comfortable with our inventory levels.

We had the complicated business; now we are direct internationally.

We feel really good with our inventory levels and the level of reserves we have put relative to the inventories and our ability to manage it.

Thank you.

Howard Tubin, RBC.

Maybe just a follow-up on inventory.

Any sense of where you will be at the end of the year in terms of percent increase versus last year?

Howard, it will be -- I think if you look at it in terms of absolute numbers, I mean a year ago our inventory was about $125 million all-in.

This year we have got the cost increase in Sanuk in that.

It's probably going to be about a 60% increase year over year is sort of our expectation right now.

Got it, okay.

And then, sorry if I missed it, but did you say what the domestic UGG wholesale business in the third quarter was?

How much that was up?

Yes, in the third quarter the domestic UGG wholesale business was up 17.5%.

17.5%, that is great, excellent.

Thanks.

Diana Katz, Lazard Capital Markets.

Congratulations on a phenomenal quarter.

I was wondering if you could talk a little bit about the UGG's kids product and any initial sell-through rates there.

Then also if you could discuss Teva in the quarter and then what you are seeing in terms of spring bookings.

Spring bookings for Teva or for --?

Yes, for Teva.

Okay.

Well, UGG kids, I think if there is -- any breaks that are being put on at UGG kids are being put on by us.

We could sell a lot of kids product, a lot more kids product than, frankly, we feel is healthy.

So we are keeping the kids assortment very fresh, very direct, and very focused and being careful about our distribution.

As well it's an expensive product for kids, so we are conscious of that and conscious that families are struggling.

We don't want to get ahead of ourselves on a kids business.

Remember it costs the same practically, because of the cost of sheepskin, to produce a kid's boot as an adult boot.

On the Teva business, we are very happy with the sell-through of the closed toe product.

That has proven to be a very important, very powerful driver for the brand.

Once again, we are anticipating 20%-plus increases on Teva brand for this year, and we feel it's on a nice trajectory.

Spring bookings were just exceptional; very happy with that.

We anticipate a lot of fresh new product, a lot more spread in assortment of Teva, and a significant amount of closed toe in the spring, which is, for Teva, really a first.

So breaking new ground with Teva every single season.

That is great.

Then just with UGGs, in terms of all these new categories you have branched out into, you have mentioned strong sell-through rates in sneakers and in cold weather product.

Are any of the categories that you have ran into not working?

Are you happy with all the categories right now?

We are pretty happy with all the categories.

The way we operate is it's always -- there is always something exiting the line and something new replacing it.

So where we don't feel we get the successes that product doesn't really progress very far.

We are also carefully initially -- when we make a decision to include something in the line, we do test it.

We get a read before we go all-in.

We don't bet the farm on any particular new style.

It's a very systematic approach.

Our stores are very helpful in this respect because we are able to get a good read and we get a read early.

So I would say right now we are getting good sell-through across the board.

Yes, there are a few items here and there, but they are not of any significant volume and inventory commitment.

Then there are items where we consciously know that because of the price point that they are more or less exclusive items.

They are limited distribution, limited production.

And those items actually selling quite well and when we run out, we run out.

Great.

Thanks very much.

Scott Krasik, BB&T Capital.

Great, thanks for taking my question, guys.

Just a couple around costs and prices.

So the 40% increase, Tom, is that locked in now for the full year all of your sheepskin needs for next year?

Yes, it is.

Okay.

Then just remind me, because I know you had 10% cost of goods increases, overall what was your total or average price increase this year?

And are you considering something similar for next year, greater, or less?

We are still evaluating what pricing we are going to do for fall 2012 at this point in time.

We are going to raise prices on selected styles, but we need to finalize that as part of our process here as far as the planning process.

This year we, again, raised it on selected styles, some of the newer product we raised it.

But, for example, this year with a 40% increase in sheepskin cost that is going to be difficult from a pricing point of view.

You really can't offset that kind of a cost increase.

Right, and I am also concerned -- I mean you said that you got, was it, 500 basis points from the subsidiary switch positive in the third quarter?

Yes, that is the benefit we have in the third quarter for that switch, which will not recur next year.

Okay.

All right, that is helpful.

And then, Angel, we had heard from some domestic customers, both department stores and retailers, that they were taking shipments later.

They were breaking up their shipments into the fourth quarter to space themselves out to keep the floor fresh.

Did that move the needle in terms of your business, and is that in fact what you saw?

No, not really.

If anything, I think what people are reacting to as well is the weather, and so that is having an impact on when they might want to take delivery.

Some people want to shift their deliveries a little bit later because we really haven't had the cold weather.

They don't want to sit on too much inventory.

It's just now starting.

This happens every single year.

Every year we have a warm spell in October and people somehow believe there is not going to be a winter.

Then last year was the coldest winter ever and they were scrambling for product in November, December, and January.

So it's just impossible to predict.

We feel we have a pretty good flow chart for our customers' needs and demands on inventory and product, and a good historical reference for all that.

It's just the normal part of running the business.

Okay.

And I guess just last, Tom, how much, if any, UK reorder business that you used to ship to the distributor is considered in the fourth-quarter guidance now?

Just to get back to the concept of the $30 million turns into $50 million kind of concept.

Last year in the third quarter there was $30 million of distributor business and that converts to about $50 million on a -- in fact that was the second moving into the third.

We had $30 million of distributor business.

It was on a distributor basis it would be $50 million, but with the change in model it was $70 million.

So that is in the third quarter.

In the fourth quarter we have got really, again like I said, really a cautious estimate of what kind of reorder business we will have in the fourth quarter in these two markets at this point in time.

We want to get through our first winter season in these two markets on a direct basis, then we will have some more experience there.

So there is a chance that that could come in, but it's not incorporated into the guidance?

Right.

Okay.

All right, thank you, guys.

Thank you all very much.

Really appreciate your attention and the questions.

I would like to also thank the team, the Deckers team, worldwide.

We have, I think, demonstrated an ability to react to changing economic conditions and keep evolving these brands and participate in some nice growth in 2012.

We will see you in February.

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

Thank you all for your participation and have a great day.