Deckers Outdoor Corp (DECK) 2011 Q4 法說會逐字稿

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

Welcome to Deckers Outdoor Corporation fourth quarter and fiscal 2011 year-end 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 conference call is being recorded.

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

Please note that certain statements made on this call regarding the Company's expectations, beliefs and views about its future financial performance, brand strategies and cost structure 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, capital expenditures, brand strategies and cost structure.

As well as the outlook for the Company's markets and the demand for its products.

The forward-looking statements made on this call are based on currently available information.

And because its business is subject to a number of risks and uncertainties, some of which may be beyond its control, actual operating results in the future may differ materially from future financial performance expected at the current time.

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

Listeners are cautioned not to place undue reliance on forward-looking statements which may 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, Angel Martinez.

Please go ahead, sir.

Thank you.

And thank you to everyone for joining us today.

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

We're very pleased to report fourth quarter sales and earnings that exceed the levels that we outlined back in October.

Our performance was driven by higher than expected demand for the UGG brand, primarily in our domestic wholesale channel.

Fourth quarter UGG brand sales increased 38%, easily pushing full-year brand sales past $1 billion for the first time ever.

This tremendous performance is a testament to the hard work put in by our UGG brand team year in and year out.

Congratulations to Connie Rishwain and the global UGG brand team.

Tom will go through the financials in a moment but I do want to highlight some of our key achievements.

Fourth quarter net sales rose 40% to a record $604 million.

And diluted earnings per share increased 40% to a record $3.18.

It was very gratifying to end 2011 on such a high note.

For the year, annual sales were $1.377 billion, up 38% over 2010.

And full-year diluted EPS increased 26% to $5.07.

Our record financial performance was a result of our global team successfully executing the growth strategies that we've implemented over the past few years.

While we regularly fine-tune our strategy to adapt to market changes, our central theme has not changed.

Which includes reinvesting in our business and our brands.

And in 2011 this included new product development, marketing, expansion of our consumer direct platform, which consists of our retail stores and e-commerce business.

And international growth including the startup of subsidiaries in Europe.

2011 also included the acquisition of the Sanuk brand, a terrific addition to our brand portfolio, and a compelling new growth vehicle for the Company.

Each of these investments contributed to our results, while at the same time strengthening our connection with consumers, improving our position with retailers and enhancing our future prospects.

Let's talk about new products.

New products and styles which continued to spearhead growth in 2011.

For the UGG brand, we introduced new styles in our classic collection, significantly expanded the style count in our women's fashion, cold weather, clog, and casual collection.

Launched our high-end Italian collection.

And broadened our men's offering.

In aggregate, the response to the 2011 fall and spring lines was very positive.

And we're confident that the evolution of the UGG brand is creating repeat customers and attracting new customers.

The popularity of our classic boots was further enhanced this year by the Sparkles and Triple Bailey button.

Which, along with selected price increases, helped drive steady growth of our largest collection.

As planned our non-classic collections were the main growth drivers.

Based on the sales mix, it is evident we are gaining share in new categories as we introduced more fashionable, functional and, of course, comfortable boots, comfortable sneakers, sandals and casual footwear for women and men.

And continue to create growth in our highly successful slipper category.

Importantly, distribution for these new collections is not limited to our own stores.

website and select wholesale accounts.

Across our department stores, specialty retail and independent networks, more and more shelf space is being dedicated to our growing lifestyle product offering.

It was a similar story with the Teva brand as new product, particularly our growing assortment of closed toe footwear fueled the brand's second consecutive year of 20%-plus growth.

Expansion of our multi-sport product line was especially critical to the Teva brand success during what was a very cold and wet spring season.

In past years this would have dealt a huge blow to the brand line performance when the line was almost exclusively sandals.

So the transformation of the Teva brand into a more well-rounded year-round outdoor performance brand is also extending its selling season deeper and deeper into the year.

On the marketing front, we know that product isn't the only thing evolving at Deckers.

Our marketing has also taken a significant step forward.

I've spoken of this before, but it's worth repeating.

We've made the transition from being an exclusively product-driven company to a product- and marketing-driven company which is an important step in altering consumer perception of the UGG brand.

And putting us on a more even playing field with other global lifestyle brands.

Our UGG brand marketing team did a terrific job in 2011, especially with the Tom Brady campaign and the launch of our men's initiatives.

Across the brand print will continue to serve as our primary platform, but you'll also see us become more aggressive in our use of media and use of mobile and digital technology to reach consumers.

And creatively educate the audience on our brand's development.

In consumer direct, which is another way we're connecting with consumers, we are expanding our Company-owned retail stores and the improvement of our e-commerce capabilities.

In 2011 we opened 18 new locations, primarily in China and Japan.

We'll end the year with 45 stores globally.

Our consumer direct channels do a great job showcasing the breadth and depth of each season's product line, while providing us with great insight into consumer behavior and buying patterns.

Important data that we're now able to mine and incorporate into our decision-making processes.

Both consumer direct channels, e-commerce and retail generate strong operating income margins.

One of the more critical investments we made over the past year was the buildout of a subsidiary infrastructure in Europe.

Now under the leadership of Steve Murray, we've developed a very strong foundation that will serve the Company well in the years ahead.

As we look to penetrate new and existing markets throughout the Continent.

We're pleased with how the initial transition to wholesale distribution in the UK and Benelux progressed.

Particularly given the total size of the businesses we assumed and the macroeconomic issues facing these markets and their consumers.

By working directly with retailers we've been able to better highlight the long-term benefits of merchandising a broader selection of the UGG brand and the entire product line, change the way they view the UGG brand and how they think about successfully growing their partnerships with us.

Which in turn is changing consumer perception of the brand.

Now this will be an ongoing process, but the results from 2011 were encouraging.

We're confident that we're at the beginning of an exciting new chapter for our international business, one that we believe has great long-term potential given the vast opportunities available for our broader product lines.

And I should be clear that these opportunities are not limited to just Europe.

In Asia, which is now being led by Pete Worley, brand President of Teva, sales particularly in China and Japan are growing at a quick pace, driven by investments in retail stores and a positive consumer response to new products.

Now to the Sanuk brand, which turned out to be our largest investment in 2011, this is a brand we're very excited about.

It's very authentic in surf and action sports and has very strong lifestyle potential with a devoted customer base beyond core sports.

The fact that Sanuk brand has been able to expand as fast as it has in the past few years, and develop such a passionate fan base, speaks to the success it has had walking that fine line between growth and maintaining the brand's original identity.

Now this will not change going forward.

We plan to develop the key retail relationships in department stores, outdoor sporting goods and specialty footwear channels to increase distribution and shelf space.

But we will not use our size and leverage to maximize the brand's opportunities overnight.

Growth will be achieved methodically and strategically.

And primarily through product lines extensions that are more appropriate for broader distribution and do not jeopardize the continued success of the Sanuk brand with the course, surf and action sports channel.

I'll now turn the call over to Tom.

Tom?

Thanks, Angel.

In addition to what Angel just covered, there's a good amount of detail about our fourth-quarter and full-year sales and earnings results in today's earnings release, including sales by brand, channel and geography.

So in an effort to leave more time for Q&A, I'm going to limit my discussion primarily to gross margins, operating expenses, the balance sheet and guidance.

Gross margin for the fourth quarter was 51% compared to 54.2% in the fourth quarter of last year.

The decline was due to an increase in product costs and higher closeout sales, partially offset by higher margins in our international business as a result of the transition to direct subsidiaries in the UK and Benelux.

For the full year, gross margin was 49.3% compared to 50.2%.

Total SG&A expense for the quarter was $131 million or 21.7% of net sales compared to $92.6 million or 21.5% of net sales a year ago.

SG&A increased primarily due to 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, fourth quarter 2011 SG&A includes additional marketing investments of $3.9 million.

Higher legal spend totaling $2.2 million.

And $4.2 million in the amortization of intangible assets and purchase price accounting tied to the Sanuk brand earn-out payment.

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

For the year, SG&A expense was $394.2 million or 28.6% of net sales compared with $253.9 million or 25.4% of net sales.

Let me summarize some of the identifiable expenses that drove the year-over-year increase in SG&A.

There was $9 million of one-time costs related to our transition to a wholesale model in the UK and Benelux.

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

$6.7 million of additional legal spend to further fund the protection of our intellectual property and trademarks.

$4.1 million of due diligence audit and transaction fees related to the Sanuk brand acquisition.

$8.6 million associated with the amortization and tangible assets and purchase price accounting tied to the Sanuk earn-out payment.

On top of these there were additional expenses for opening and operating 18 new stores and increased payroll as a result of running a larger company, particularly with the addition of our new subsidiaries in Europe.

Now to operating income.

For the fourth quarter operating income was $176.8 million or 29.3% of sales compared to operating income of $140.7 million or 32.7% of sales last year.

For the year, operating income was $284.8 million or 20.7% of sales compared to operating income of $249.1 million or 24.9% of sales.

The decline in operating margin was a result of the slightly lower gross margins in the aforementioned investments in our global operating platform.

Our effective income tax rate for the fourth quarter was 28.2% compared to 35.2% in the fourth quarter last year.

And for 2011 our effective tax rate was 29.2% compared to 35.9% for 2010.

The lower tax rate was driven by the increased mix of international pre-tax profits.

Capital expenditures for the full year were approximately $55.8 million, higher by $32.7 million from 2010 driven mainly by the build-out of 18 new retail stores and the land for the new corporate facilities.

Turning to the balance sheet, at December 31, 2011, inventories increased 102.6% to $253.3 million from $125 million at December 31, 2010.

By brand, UGG inventory increased $107.1 million to $201.8 million at December 31, 2011.

Teva inventory increased $6.6 million to $29.3 million at December 31, 2011.

Our other brands inventory decreased $1.5 million to $6.1 million at December 31, 2011.

The newly-acquired Sanuk brand inventories were $16.1 million at December 31, 2011.

The increase in inventory from a year ago is fairly equally balanced between the growth in spring orders, inventory for our direct subsidiaries in the UK and Benelux, the addition of the Sanuk brand, and growth of our consumer direct division, carryover products from the holiday period, which will be utilized to fulfill orders during 2012, and an increase in product costs.

In addition, at December 31, 2011, we had cash and cash equivalents totaling $263.6 million compared to $445.2 million at December 31, 2010.

The decrease in cash and cash equivalents is primarily attributable to $125.2 million of cash payments associated with the acquisition of the Sanuk brand.

As well as approximately $20 million of cash payments for land for our new headquarters facility.

At December 31, 2011, we had zero borrowings outstanding under our credit facility.

Accounts receivable at December 31, 2011, were $193.4 million compared to $116.7 million at December 31, 2010.

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

Now moving on to our outlook, based on current visibility we expect 2012 revenues to increase approximately 15% over 2011 levels.

For the full year we expect UGG brand sales to increase by approximately 11%, Teva brand sales to increase 10%, Sanuk brand sales to be approximately $90 million.

Our other brands combined to be flat.

Note that Sanuk brand sales were $69 million in 2011, which includes $42 million from the first half of 2011 before we acquired the brand.

We currently expect diluted earnings per share to be roughly flat with 2011 levels, which assumes a 200 basis point year-over-year decline in gross margin.

And SG&A as a percentage of sales of approximately 29%.

Our effective tax rate is expected to increase to approximately 31% in 2012, driven by the increased mix of domestic profits compared to 2011.

With regard to gross margin, we expect cost of goods sold, which comprised about 51% of sales in 2011, would have been up approximately 10% in 2012 over 2011 as the result primarily of higher raw material costs.

Namely sheepskin, which are up approximately 40% over 2011 levels and up approximately 80% versus 2010.

The higher sheepskin prices are costing us about 500 basis points of gross margin, or roughly $1.40 in earnings per share in 2012.

However, primarily through selective price increases, the full year addition of Sanuk, and a greater contribution from our retail division, we'll be able to offset about 300 basis point of the gross margin decline.

And fully offset the negative impact to our bottom line.

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

These include increasing the mix of non sheepskin products, new footwear materials and new production technologies, and taking advantage of lower-cost production including the United States where we will begin sourcing product from later this year.

Included in our SG&A projection are non-cash charges of approximately $13 million associated with the amortization of intangible assets and purchase price accounting tied to the Sanuk earn-out payment.

We will also make additional investments in marketing and European and Asian wholesale and retail infrastructure that we feel are important to the long-term development and growth of the Company.

Our capital expenditures in 2012 are expected to total approximately $90 million, up from our 2011 level of $56 million, driven mainly by the buildout of 25 new retail stores and corporate facilities.

We continue to evaluate the financing of our new corporate headquarters, including securing longer-term financing, as well as the potential sale and leaseback scenario.

For the first quarter of 2012, we currently expect revenues to increase approximately 19%.

And diluted earnings per share to decrease approximately 50% compared to the first quarter of 2011.

First quarter guidance includes estimates of approximately $3.5 million or $0.06 per diluted share associated with the amortization and accretion expenses related to the Sanuk acquisition.

This guidance also assumes a gross profit margin of approximately 48%.

And SG&A as a percentage of sales of approximately 43%.

As a reminder, a significant amount of our operating expenses are fixed and spread evenly on an absolute dollar basis throughout each quarter.

This includes the costs associated with the 15 new stores that were not open until the second half of 2011.

Therefore, due to the aforementioned increases in SG&A, we expect our earnings to decline in the first half of 2012 as compared to the first half of 2011, which are typically our lowest volume sales quarters.

And increase over 2011 in the back half of the year.

With regard to the second quarter, which with last year's international wholesale conversions is by far our lowest volume quarter, we expect our loss per share to more than double from the same period last year.

As a result of a lower sales growth and the higher expenses I just mentioned.

And finally, as we announced in today's earnings release, the Board of Directors has authorized a $100 million stock repurchase program.

Thanks to our strong operating performance, we have the cash available to fund a program while continuing to invest in our brands and business.

Our earnings per share guidance for 2012 does not include the impact of any potential share repurchases.

I will now turn the call back over to Angel.

Thanks, Tom.

We begin this year with more conviction than ever about the long-term growth opportunities that lie ahead for the Company.

This is reflected in our upwardly revised targets that call for sales of $2.4 billion by 2015.

Up from our previous estimate of $2 billion that we introduced just last year.

Which represents a compound annual growth rate of about 15% from 2011.

Our new target includes $1.85 billion in UGG brand annual revenue versus $1.2 billion in 2011, a compound annual growth rate of about 11% over the four-year period ahead.

A similar exercise for the Teva brand using our target of $250 million in annual revenues versus $125 million from this past year yields a compound annual growth rate of about 19%.

And based on $200 million for the Sanuk brand compared to approximately $69 million in 2011, that equates to a compound annual growth rate of roughly 30%.

Looking at our long-term goal by region, we believe 40% or about $960 million will come from outside the US, up from $432 million in 2011.

Which mean a compound annual growth rate of about 22% for the international markets and around 11% for our domestic business.

Based on our current momentum, we believe these goals are achievable using the same strategies that generated 38% growth in 2011.

Namely product and category expansion, increased emphasis on marketing and advertising, retail store expansion and capitalizing on the untapped international opportunities in both existing and new markets.

And with regard to the near term we are equally as optimistic.

Despite the mildest winter in recent memory, we still grew UGG brand sales 38% in the fourth quarter.

We believe this is a testament to the growing popularity of the brand and the strength of the product collections that we've developed.

While we're not immune to weather, especially with our small but growing line of cold weather boots, we believe that the comfort factor, combined with the new fashion products we provide, positions us better than the majority of our peers.

That said, the fact is, when retailers are sitting on excess inventory of winter apparel and footwear, it impacts everyone including us, as opening buy dollars to the following season are reduced.

But as you just heard from Tom, we're projecting sales to grow 15% in 2012.

Which, again, I believe speaks to the power of the UGG brand and its importance to retailers.

To break down 2012 further, our backlog is up 15.1%.

We expect our domestic business to grow approximately 12% on top of a 24% increase in 2011.

This will be driven by increased demand for both spring and fall collections, an increase in shop-in-shop.

And the addition of four new retail stores, including our first-ever men's only store, adjacent to our Madison avenue location.

We project international sales to increase 20% through steady growth from new products in our subsidiary markets of the UK, Benelux, China and Japan.

And our European and Asia and distributor markets.

Plus the opening of 21 new stores including locations in Paris, the UK, the Benelux, China and Japan.

International sales are projected to represent approximately 33% of the Company's net sales in 2012 compared to 31% in 2011.

Looking at our consumer direct division, 2012 retail sales are projected to grow approximately 49% driven by 25 new store openings.

And mid-single digit comp increase on top of a 6% increase this past year.

And e-commerce sales are expected to be up approximately 21%.

We believe that the combination of growth I just outlined speaks to the success we've had diversifying our business in terms of distribution channels and geographies.

And underscores the strategic benefits of the brand portfolio that we put together.

In the face of 40% higher sheepskin prices, it's the growth of our retail business and contributions from Sanuk, along with selectively raising prices, that's providing us the opportunity to hold our bottom line flat in 2012.

As we continue to diversify our business this year and beyond, we believe that we'll be well positioned to take advantage of any pullback in material costs and better absorb other challenges that potentially arrive down the road.

I want to close today's prepared remarks by thanking our entire organization around the world for all the hard work that went into making this past year such a great success.

And that will carry forward the momentum into 2012 and beyond.

Operator, we're now ready to take questions.

(Operator Instructions) Jeff Klinefelter with Piper Jaffray.

I just wanted to follow up, Angel, with a question or a couple on the UGG outlook.

You said domestic up 12% is your plan.

Could you give us a little bit more of a breakdown on that?

And generally speaking, what kind of pricing versus unit growth, as I know pricing has been an important driver of your business with the mix.

And then, any further breakdown on actual separating wholesale growth from retail would be helpful.

Thank you.

Generally speaking, from a category perspective, we expect that we have been doing over the last few years managing the classic business as a percentage of total to a modest growth.

Because we feel that we have the distribution we need for those kind of products.

We'll continue to drive our growth in the new categories of fashion apparel.

The men's category is a growth opportunities, the kids' category is a growth opportunity.

We typically don't break out wholesale versus retail growth in this call, or actually in any call.

But that said, we're being aggressive when it comes to our retail strategy.

As you can see, we're opening four more stores.

We're going to be more aggressive in our e-commerce business.

We have historically taken really the tact that e-commerce was as much a service opportunity for our consumers as anything else.

But now we're behaving and strategizing more like an online seller.

And competing and marketing as effectively as anyone should in this particular area.

We're getting a lot smarter about it, made some investments in that area.

So we expect that that channel will continue to evolve very nicely.

Keep pace with the rest of our growth agenda across the other channels.

Go ahead, Tom.

Just to add there, in terms of the 12% domestic growth, that included all brands.

It included Sanuk, as well.

And I think just to give you some general direction, it's more volume driven relative to price driven.

And it's more retail growth versus wholesale growth, just generally speaking.

Okay.

And so the UGG specific growth, domestically, would be what?

I think you said 11% in total for the year.

What would UGG domestic specifically be for the year?

That is a larger, mature business, obviously.

That 11% is on a global basis.

That includes retail, as well.

So we're being cautious with the UGG domestic growth number at this point in time.

Okay.

One just last clarification.

You said out of your inventory, which no doubt people are watching closely coming out of this season, there's some carryover inventory.

It's a relatively modest component of the current inventory at this point, and how you plan to manage it.

I know you called this out a year or two ago, as well, and said that you would sell it throughout the year.

Same sort of strategy?

You're not planning to put it in off price?

Can you give a little color on that?

Sure.

The majority of the product that's carrying over is classic-type product.

Now, that product, as you know, we sell that year in, year out.

That really does not obsolete.

And in the past we've successfully done that.

We're doing that this year.

As we have evolved to more fashion oriented product, obviously then a bigger part of the mix is going to be product that runs a fashion cycle and then gets closed out.

That's the normal way of doing business in fashion, as you know, Jeff.

So over the next few years you're going to expect to see more close-outs from us.

Not necessarily on the classic front but certainly on some of the more forward fashion items because they have a life cycle and at the end of their life cycle they have to be closed out.

And that's a planned thing.

That's just the way business is done, as you know

Okay, great.

Thank you very much, guys.

Bob Drbul from Barclays Capital.

A couple questions.

On the 2012 outlook, with regard to the gross margin outlook specifically around pricing.

The decision that you guys have made on price for the line throughout 2012, do you believe that you have pricing power still?

Can you price, is the question, and are you choosing not to take price as you look at the trends of the business and where we are today?

We feel that we're comfortable with the pricing targets we now have.

We really don't want to go any higher on some of our classic products.

We think that we have always felt that it is an accessible brand to consumers.

If the price gets pushed up too high I just don't feel that that's a good strategy.

You end up with a risk of putting market share at risk and I don't want to do that.

I think we have to remain very competitive in the market.

We have a lot of people that imitate our product.

They're facing the same sheepskin issue problems that we are.

And so their prices have gone up, as well.

So in relative terms, we always want to remain accessible to our consumer, not push that edge too far.

So we're really pretty comfortable that we're at the pricing that we need to be at.

And then if you were to fast forward 12 months from today, on '13 when you look at the expectation around costs or pricing, would you expect to get back all the gross margin in 2013?

Or how would you think about it one year out from where we are?

Bob, on that, the biggest determining factor, again, on 2013 is going to be where we land on sheepskin and what the sheepskin pricing will be for mostly fall 2013.

And we did discuss some of that in that we feel we've come to a high watermark at this point in time.

So that's just the biggest determining factor at this point in time.

To Angel's point, on some of the classic products, especially I think we've pushed the sales, the pricing as far as we can at this point in time

Got it.

And then can you talk a little bit about your retail stores, like the comp performance in the fourth quarter?

And anything that you learned in the different stores.

Or any callouts that you would make around different regions for your retail store?

Hi, Bob.

This is Zohar.

The retail store, the comps really followed what we've seen through the macro environment.

Overall we have a good comp.

Depends on the region.

Less in where the cold climate, they don't materialize.

In the international market we have been impacted the same way as others, especially in Europe in the performance of the stores.

Okay.

Thanks very much.

Omar Saad with ISI Group.

Thanks.

Good afternoon.

Two questions actually.

The first one is on the 500 basis points of the sheepskin impact this year.

We cover a lot of these companies that are dealing with cotton pricing and cotton is publicly quoted.

Could you help us remind us all the different factors going into that sheepskin pricing, that inflation there?

I know LDMH recently bought a crocodile farm as a way for them to better control the crocodile skin costs for some of their bags.

Are there strategies on the cost side you can do to deal with the sheepskin inflation and the volatility in that pricing in the marketplace?

And then I have another follow-up.

Thanks.

Omar, let me take that one.

Sheepskin, it's a little bit different market that you have for cotton and so forth.

First of all, you talk about sheepskin, you talk about the quality of the sheepskin.

For example, we don't source sheepskins from New Zealand because the skins over there, they are not a good fit for our products.

We use the premium, the highest quality of sheepskin.

So the bulk of our sheepskin is coming from Australia.

Sheepskin is a by-product of the meat industry.

You don't slaughter a sheep just for the skin itself.

So the demand for sheepskin and the market for that is really being driven by the demand for red meat.

It's also impacted by the weather, the drought.

It also depends on wool prices.

So what you've seen in the last few years, that the supply of sheepskin, mainly in Australia, has been declining while the demand for sheepskin has increased throughout the world.

And that's why you've seen a compound increase of 80% from 2010 to 2012.

What it has done and what we're hearing is, first of all, as Tom said, it appears that we are at the top of the market.

Earlier indications we are getting we're going to start to see some relief for next year.

And hopefully some slight indication of price reduction.

We won't know it until Q3.

What it has done, it pushed a lot of people out of the market.

While you saw a year ago and a couple of years ago, people are coming and using sheepskin products, people are getting out of the market because of the cost of the product.

The thing that we have done to counterbalance, and Tom talked about it, there is not a silver bullet that you can compensate for the 80% increase.

It's looking through the whole supply chain and making it as efficient and lean as possible.

And start all the way from the design of the items, how much product you're using, product innovation, sourcing, where you're sourcing, how you're delivering.

For example, this year, as Tom indicated, this is the first time we're coming back to the US, believe it or not, and we're seeing some savings by doing that.

So that's our plan how to address it.

As Tom said, it's a long term.

You're not going to see an impact over one season.

But that's our plan how to mitigate it and address it for the long term.

Thank you.

And then my follow-up, on another topic.

How are you thinking about -- I know you mentioned that you're really focused on the retail, expanding your own retail stores, the stores are very productive.

But how are you thinking about your channel mix overall and the types of retailers that you're distributing through, both in the US and on a global basis?

There's been a bit of a renaissance in some of the higher-end department store marketplaces.

I know you're in some of those.

You're not in all of those.

But at the same time it seems like there's been, at least globally with the kind of specialty-type regional and local chains, they seemed to be operating a little bit weaker across a lot of categories.

I don't know if you have any updated thoughts on your channel distribution mix strategy.

Thanks.

I think over the last few years you've seen us involve especially with the shop-in-shop approach that we've taken to retailers who understand brand, have the real estate to devote to brands for the appropriate presentation.

Our spread and assortment has grown to the point where it's a very significant investment for a retailer.

So it represents a very long term commitment.

There were people who were not as committed to the brand and the evolution of the brand who, over the last few years, have fallen a little bit off, off the pace.

And they've been replaced by larger people.

In some cases, our own stores have been a better draw for consumers.

So it's just the evolution of a brand.

This is what happens to all brands.

We remain totally committed to all the retail partners we have and that we've had over the years that have built our business.

But the brand is not going to wait for people to come around.

The brand is growing.

It has momentum.

It is growing across multiple categories.

And it requires, I think, a commitment from retailers as well as us giving them the commitment.

So we're plowing forward.

Thanks, guys.

Good luck.

Mitch Kummetz with Robert Baird.

I've got a few questions.

Let me start on pricing.

Angel, you talked a little bit about pricing and I just want to clarify.

I've heard from some retailers that you guys were taking up some prices for 2012, including on the classics.

But it doesn't sound like that's the case.

Could you say exactly what you're doing pricing across the UGG brand for 2012?

Is it truly flat or is it up a little bit?

We have taken price increases on some classic product.

We've taken price increases on classic short, classic tall.

I'd say pretty much there is an across-the-board increase.

Now it varies.

Some products selectively have increased more than others.

Certain iconic products, as I said, we're pretty careful about not hitting our head against the ceiling with consumers on some of these products.

I think, for example that you don't want to get too far above $200 on a classic tall.

I think that that could be too exclusive and leaves a lot of consumers out of the mix.

So we try to stay right around $200 and close to that.

So it's a combination.

Really, it's by product, by item, where we feel that we have head room.

And in some areas we choose not to, for competitive purposes.

Okay.

And then a couple things on Q4.

First of all, Tom, could you maybe talk about what the impact on gross margin was from the higher close-outs?

And then also could you tell us what your own retail comp was on the quarter?

Yes, Mitch.

The impact on the margin for the quarter relative to close-outs was roughly 50 to 100 basis points, at the most.

Okay.

And then the comp on the quarter for your own stores?

Maybe while you're looking that up, I was also hoping you could give us a little more color on the gross margin puts and takes for 2012.

You talked about, about 5 points of pressure from sheepskin, and then about a 3-point offset from some benefits.

I was hoping maybe you could just speak a little more towards those benefits.

How much gross margin do you get back from DTC?

How much from Sanuk?

And are there any other big items, gross margin items, that benefit you in 2012 that we should be thinking of?

Let me get back to the puts and takes on 2012, what we talked about, the sheepskin cost pressure for 2012, puts 500 basis points relative to that.

We're going to recover 300 of that in the form of pricing, Sanuk, and mix of retail and all that.

And of that 300, it's pretty split between half of that roughly being pricing and the other half related to those mix items.

And on the comp for the fourth quarter, the fourth quarter comp for our own stores was 1%.

Okay.

All right, thanks, guys, good luck.

Camilo Lyon, Cannacord Genuity

Can you discuss what the conversations are with some of your wholesale partners domestically around the shop-in-shop strategy?

And how that's slated to unfold for 2012?

And if the fourth quarter had any negative impact on how people want to, or customers of yours, want to adopt that strategy.

We've had no negative impact on that.

It's been an ongoing strategy for us, particularly as the brand evolves to multiple categories of product and multi-season.

So the investment in the UGG brand is a year-round investment.

Shop-in-shops are strong performers on a square foot basis in every single location we're in.

They perform in the spring.

They perform in the fall.

As a matter of fact, over the years we've been more reticent to open shop-in-shops.

We could have opened a lot more shop-in-shops than we have.

We're very selective about the shop-in-shops.

The retailer pays for that buildout, that's not something that we fund.

So it is in effect a great way of showcasing an evolving brand on a year-round basis

And could you remind us where you're at right now, where you entered the year at and what that could look like for 2012

We ended the year at about 390 shop-in-shops globally and roughly for 2012 we're looking at another 100 roughly

Another 100?

Yes

Okay.

And then my final question, Tom, if you could just break out what the benefit was to the gross margin line in the fourth quarter from the international transition.

That was roughly 300 to 400 basis points positive

Great.

Thanks and good luck with '12.

Diana Katz with Lazard Capital Markets.

I wanted to know if you could talk a little bit more about inventory.

How should we think about it for the rest of 2012?

Do you expect it to go down any subsequent quarter and at any point more normalized with sales?

I think the way to look at inventories for the year are in the first half of the year the inventories will be up.

In fact, every quarter inventory will be up relative to 2011 for each quarter.

The first half of the year up higher than the back half of the year.

And by the end of the year in the fourth quarter we expect to exit the year at quarterly inventory turn calculations pretty similar to how we exited 2011.

Okay.

And then on the SG&A line outside of the amortization of the accretion expense with Sanuk, can you help us quantify some of the other SG&A buckets, like marketing, legal, et cetera?

Is that for 2012?

2012, yes.

I think a way to look at that in terms of relative guidance and absolute operating expenses in 2011 versus 2012 for the total year, if you go through the guidance, there's roughly one-third of the increase that you'd be modeling that is related to Sanuk.

And that's going to include Sanuk's amortization of its intangibles, as well as its purchase price accounting.

About 50% of the increase year over year is relative to the retail and the international infrastructure investments we're trying to grow.

And then roughly 20% of the year-over-year increase in SG&A is related to marketing expenses.

Okay.

And then can you talk about in terms of your order book how much is comprised of the new men's business initiative and how orders ended up there?

Well, we haven't generally broken out what the order book looks like.

We had a very healthy increase in our men's business in 2011.

It was up over 30%.

So we felt that that was a great performance driven primarily by great new product and the men's campaign featuring Tom Brady.

So we're going to continue driving down that path.

We know that's an opportunity for us.

We're getting more and more distribution on the men's products for both spring and for fall.

So we're very excited about that.

Okay.

Thank you very much..

Taposh Bari with Jefferies & Company.

Quick question.

I wanted to ask a question on just the fourth quarter and what you're seeing here in the first quarter.

I get that UGG is very much a comfort brand, but it seems inevitable that weather is playing a role for a lot of companies here this past holiday season.

So I'm just hoping you can talk about maybe if there are any parts of the country in the US or any geographies globally where weather played less of a role.

And if you can talk to how those businesses did, just to get a cleaner perspective on how the UGG business performed ex weather, if possible.

I always try to point to California.

I always use California as a reference point.

Yes, we're having a warm winter around the country.

It's still colder than it is in California.

And the consumer in California has, for many years now, been in replenishment mode with UGG as a comfort product.

The minute the evenings cool, and we're not talking 30 degrees because we don't see that here very much, but 50s, it's just time to wear UGGs.

And that is the pattern.

That's the pattern that emerges everywhere in the country where you start to see the consumer embrace the brand as a comfort brand, and then get into the replenishment of the product.

Whether it's slippers, whether it's classic, that's the pattern.

So I think it's vitally important to understand the brand from that perspective.

The brand did evolve in Australia which has a climate very similar to California.

And continues to be.

Down there, it's iconic.

The type of product is iconic.

So, we have faith in the power of the brand to do that.

And we haven't seen any example around the world where that's not the case.

And there's common reference to the brand as cold weather, et cetera.

It is not a cold weather brand.

It is a comfort brand, as I've said on many occasions.

Now, as I said in my comments, the warm weather did impact our retailers.

There's no doubt about that.

And we're not immune from the impact of our retailers.

So they are adjusting their open-to-buys for fall for next year based on performance of product this year.

And the weather has had a lot to do with their decision making.

The one most important thing is, of all the brands that they depend on for their fall season and for holiday, UGG performed the best.

And that continued to be a highlight for retailers, he UGG brand performance in the fourth quarter.

Great.

That's very helpful.

And if I could just ask a follow-up along the lines of the iconic stature of where UGG has been historically now you're entering more non classic styles.

How do you see that iconic brand position translating to some of these more competitive styles?

And also, along those lines, should we expect to see similar types of net product margins on those businesses as we move forward to what you've seen historically with the classic product?

What's iconic about the brand, obviously the brand has a certain look in terms of classic, but the consumers who wear UGG love it for the way it feels.

Nothing feels like UGG.

That's just a fact.

So, as we've successfully infused the comfort and the feeling of UGG into other products, consumers have preferred that feeling to similar silhouettes that don't have what UGG does -- the sheepskin, the premium luxury comfort nature of it.

And that's where we've been very successful.

We can take a pattern that's a fairly common pattern in men's, for example, a certain type of boot, a certain style boot, say a motorcycle boot, and UGG-ify, as we say, that boot.

So you can wear it with no socks and your feet stay perfect.

You're not cold, you're not hot, just right.

Find that sort of Goldilocks zone for your feet.

And that is what makes the brand special.

Around that idea we have continued to evolve product.

Now, as we do more and more fashion product -- and there is some product in the line that does not have much sheepskin, if any.

We have sandals that have no sheepskin.

Those are seasonal items and those represent a small percentage of the product line.

And those products will be closed out.

There will be markdowns on those products.

That's the nature of the beast.

That's what we do.

But what it's doing in total is creating a much more powerful lifestyle brand and lifestyle statement for the brand through retailers.

It's a very compelling brand to be associated with as a retailer.

It delivers tremendous volume and profit and will continue to do that.

Okay.

Thank you very much.

Good luck in 2012.

Christian Buss with Credit Suisse.

I was wondering if you might be able to provide some color on how we should think about the margin profile of the business in a more normalized costing environment, given the shift to more fashion-oriented styles, the shift to owned retail?

How are you guys thinking about that longer-term margin profile of the business?

Christian, what we had talked about there is it's all about the sheepskin.

And we feel that we've hit a high point there.

And if we can start getting lower sheepskin prices, then we've got the opportunity to get more leverage into the model, more earnings power.

So, that is something that needs to be sorted out.

And when we've got more visibility as the year goes on as to what the fall '12 sheepskin prices will be, then we'll have a better idea to answer that.

But that being said, still longer term, we believe with the Sanuk, the retail expansion, expansion of e-commerce, some stabilization of sheepskin cost, we think longer term we still are targeting an operating income margin of 20%.

Okay.

That's helpful.

And then could you provide some color on your strategies to drive e-commerce business and owned retail business in 2012?

Yes.

As Angel mentioned, we've done certain things.

We've been building both from internally and externally using more and more social media methodology and so forth.

And also upgraded our platform.

We last year moved to a demandware which is a cloud system that allows us to expand internationally.

So in addition to the US, now we are operating also in Canada, in the UK, in the Benelux.

And we started this year also in Japan.

And we're looking for next year to be also in China.

So e-commerce is going to continue to be very strong.

Both it's a brand building tools for us, but also a consumer direct selling vehicle for us.

Thank you very much and best of luck.

Jim Duffy with Stifel Nicolaus.

This is Eric Alexander in for Jim Duffy who is traveling.

Thanks for all the color on everything.

I do appreciate it.

Just looking at the Sanuk, the $13 million in charges, is that an incremental $8.6 million year over year?

Or are we looking at that in total?

The $13 million is a total number.

It's not an incremental number.

Okay.

And then in looking at Sanuk, have you guys roughed out what you're looking at from an accretion standpoint that you'd be comfortable providing at this stage?

We certainly have roughed that out with the guidance that we gave for the total year.

And even with the amortization and accretion, the operating margins are greater than the overall.

Well-- you ex out the accretion and the amortization, the operating margins are greater than the overall Company average.

And even with the accretion and amortization operating margins are real respectable.

Okay.

But you can't provide EPS-wise what you're --

It's certainly accretive.

Okay.

That's helpful.

And then on the FX impact, what do you guys have built into your guidance as far as some of the assumptions that you're taking into account?

Yes, what we built into our assumptions there, crystal ball, especially in today's FX environment.

But what we're looking at now is our guidance that assumes, or the current forward rates which are pretty consistent with the current spot rates.

And we actually do, at some of the contracts we entered into were a while back, the hedging contracts.

We've got some small benefit there from those.

But that's net-net what our assumption is on FX right now.

Okay, that's helpful.

And then if I could just sneak one last one in here.

I apologize if you already touched on it.

On the international wholesale growth did you break that out as far as what you guys were assuming in 2012 growth-wise?

No, we did not.

We just gave out total international channel growth which included wholesale and retail.

Okay.

Thank you very much and best of luck.

Chris Svezia with Susquehanna Financial Group.

Just on the international side, I think you guys said it was 20% growth.

And I know that's retail and wholesale, as Tom just mentioned.

But could you maybe just talk about what you're seeing in Europe, your thoughts about how the transition unfolded?

And just thoughts about the UK business in general, as you think about 2012.

Is that a growth region for you guys from a wholesale perspective?

Maybe add a little color on the international side what you're saying.

Yes.

We think the transition, as you recall, we had a little bumpy road at the very beginning but we smoothed all that out I think when Steve Murray came onboard.

We were able to provide some leadership into the region.

He's done a great job.

So that is very stable and we feel it's a platform for growth across the entire European theatre.

Now, UK is a tough market right now.

Every brand is struggling in the UK.

Business is soft.

The economy has been pounded there.

Yet we still see that as a growth opportunity.

We see it as a growth environment.

The brand has had good success with the store that we've opened.

We're opening another store in Piccadilly just in time for the Olympics.

We think the Olympics is going to have a positive impact on the economy in the UK.

And we're expecting that we'll be able to benefit from that with our store presence.

The rest of Europe looks pretty healthy.

We've had nice solid performance in Benelux.

We'll be developing an ongoing and evolving business in France.

We'll be opening a store in Paris relatively soon.

We're developing our wholesale business in France, developing wholesale business in Germany through a distributor.

And then there are some untapped markets in Europe that are offering some tremendous opportunities.

Poland, Hungary, the Czech Republic where we feel we have opportunity.

Of course, there are markets like Spain that are struggling.

Italy has remained fairly solid for us.

We have a distributor there who does pretty well.

So, Europe, it's anybody's guess as to when it's going to turn around.

But the recent improvements in the macroenvironment via them coming together and beginning to address some of the issues has really put us, I think, in a better mindset about it.

Okay.

And then just, Tom, you made some reference to Q2, you expected, I think, the loss to more than double due to lower sales growth.

And I'm just curious.

I think you're up 12% in Q2 last year.

Is the sales growth rate lower than that?

I'm just trying to understand what you meant by that comment, if I got that correctly.

Yes.

Sales growth, it did slow, you're right.

Last year Q2 was, in spite of the distributor conversion last year, with the shift, we still had sales growth.

But this year's sales growth in Q2, there's no distributor conversion impact this year.

But it will be growth and it will be growth similar to last year's second quarter growth.

Okay.

I got you.

And then just lastly, Angel, for you, an UGG branding question.

There's a lot of just chatter and thought process, one, that either the UGG brand has lost some momentum coming through 2011.

And some camps are saying, if weather was really the only issue to some degree, that moderated some of the growth.

And that's fine.

It's just weather and it happens and the brand still has a lot of momentum and demand for it.

Maybe people chase as you go into the back half of the year for open-to-buy inventory commitments.

So I'm just curious, when you speak to wholesalers, is that just really strictly the case, that it was weather shrinking open-to-buy?

Or did they make other comments about open-to-buy converting to either other brands?

I'm just curious if you could flush out some of the thought process in and around that.

I have had no indication that our bigger customers have seen any slowdown at all, other than the weather being the issue.

The brand remained powerful throughout the year.

It continues to show great momentum.

It is still the most important performing brand in the back half of the year for virtually every retailer we do business with.

There are some small retailers out there -- and I'll be delicate because I don't want to offend anybody.

But, let's use the word resentful.

They're a little bit resentful, on occasion.

Maybe we have a store a little too close to their store.

Maybe it's they don't like that we've opened a certain -- like we have some Journey stores in California that we really felt important to open and maybe ruffled a few feathers that we opened those stores.

And that's just the way it is with brands like UGG.

You do get to that place where the brand has to continue to evolve.

You have to keep growing.

You have to keep powering forward.

And what I've found, independent of anyone I talked to, is that without UGG it's very tough to make your fourth-quarter number.

UGG is a brand that delivers results every fourth quarter.

It is a must-have brand for most of our distribution, virtually all of our distribution.

Life without UGG is more difficult.

So we're very respectful of all our retailers.

And we ask those who have taken the opinion that maybe we're too big for our britches, and for whatever reason they want to cast aspersion on the brand by spreading rumors.

And that's a lot of what happens.

It's annoying, a little frustrating, but we look right past it and go right to our consumer.

And they seem to want more, not less UGG.

So we're pretty confident we're on the right path.

Okay.

Thank you very much and all the best in 2012.

Scott Krasik with BB&T.

Just one bigger picture question and then a housekeeping question.

Angel, some of your biggest retailers, Nordstrom, Dillard's, Journey, they've seemed to have locked pricing up in the last two weeks.

The UGG tall is now $200.

The Bailey Button tall is $220.

I'm consuming that's on carryover '11 products, you guys don't benefit from that.

Are you doing that to test, see how the consumer reacts to the pricing?

And then, I think, at least what we've heard, that there's going to be another step up after June on '12 products.

So maybe you could comment on that.

My guess is that there are people that have taken the price up prematurely.

And they're looking at the fall price list and raising the prices in advance of fall product hitting the shelves, especially where they see product that is carryover product.

We call that margin enhancement opportunity.

Exactly.

Does that give you testing?

Do they tell you we're seeing the elasticiity of X and maybe we don't feel as comfortable with the fall pricing?

Will you change your fall pricing?

Or the fall pricing is set and it is what it is?

Fall pricing is set and we haven't had any comments that there's resistance.

Our fall pricing is set and the pricing as it is, is still great value for money.

Yes, the price went up.

But we've never compromised the quality of materials.

It's the price you pay for the quality that we're putting into the product.

If we wanted to mitigate -- one mitigation effort that we have not employed and we will not employ with the sheepskin issue is lowering the quality of sheepskin.

And we're just not going to do that.

So, it's just a vital part of who we are, and quality is the most important thing.

I think it's what differentiates us from the look-alikes.

So we're going to keep going down this path, the only path.

We don't have any choice.

Okay.

And then, Tom, of the roughly $95 million increase in international sales in Q4, how much of that was just strictly related to the distributor subsidiary conversion?

Hang on.

I got that for you.

The lift, fourth quarter.

That would be roughly, in the fourth quarter the increase in international sales due to the change in model just for the fourth quarter alone is about $15 million to $20 million.

Okay, all right.

Thanks very much, guys.

Good luck.

Howard Tubin with RBC Capital Markets.

Can you just give us a little more clarity on your retail store openings for next year?

Are any of those in the US?

Are they all outside the US?

Maybe a little more detail by location.

Yes, Howard, as we said, out of the 25 about 4 of them are going to be in the US and the other are going to be broken down probably evenly between Europe and Asia.

Asia, it's mainly China and Japan.

In Europe you will see a handful of them in the UK.

Angel talked about also France.

And the Netherlands

Got it.

And are they all full price stores or any outlet stores?

The bulk of them are going to be concept store, full price stores.

Got it, okay.

Maybe just one more question.

On the closeout product that you have, where does that end up?

Does that go to a T.J.

Maxx or Marshalls or does that go to your outlet stores?

How does that stuff get sold off?

It goes out in proportional supply to DSW, to T.J.

Maxx, our outlet stores.

It's not enough product to overweight any part of the market.

It never has been and certainly isn't this year.

We do a pretty good job of closing out the obsolete inventory.

Got it.

That's great.

Thanks.

Thank you all for participating today.

And really appreciate your support over this last year and look forward to your ongoing support in 2012.

And once again, thanks to the entire team around the world at Deckers.

And we look forward to talking to you next quarter.

Thank you.

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

We'd like to thank you all for your participation.