Deckers Outdoor Corp (DECK) 2012 Q1 法說會逐字稿

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

Welcome to the Deckers Outdoor Corporation's first quarter fiscal 2012 earnings conference call.

(Operator Instructions).

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

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

Please note that certain statements made on 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 maybe beyond its 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 Form 10-K and its other documents filed with the SEC.

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

The Company undertake no obligation to publicly release or update the results to 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 to everyone for joining us today.

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

Our first quarter performance reflects the evolution of our business model and the external factors that we believe have pressured sales growth and a margins.

Particularly the differences in weatherand sheepskin prices versus the same period a year ago.

The Sanuk brand, the newest addition to our portfolio, started the year off very well.

Strong sell-in of the spring line has be followed by equally strong sell through at retail in March and April.

At the same time, wholesale orders for the UGG brand spring styles were up meaningfully versus a year ago, as was sell through in the domestic stores.

Sales of the Teva brand expanded closed toe offering also delivered solid gains.

Unfortunately, very mild temperatures, along with the tough comparison created by the cold and snowy conditions across much of the US this same time last year, had a noticeable impact on boot sales during the first quarter.

Despite the challenging conditions, we believe that we have done a good job be managing inventory and adjusting our purchase orders.

We expect to enter the fall selling season in good shape with relatively clean channels.

In terms of our bottom line performance, earnings were down approximately 59% versus a year-ago, which is primarily attributable to the increase in sheepskin prices, together with the increase in operating expense from our growing retail organization.

As we have previously indicated, sheepskin prices are up 40% in 2012 from 2011.

Zohar will speak more specifically about the outlook for sheepskin prices in a moment, but they do appear to be coming down from historic highs, which should provide relief beginning in 2013.

And we do expect to get better leverage on retail expense over the full year, driven by the fourth quarter, when that channel typically generates more than 50% of its annual revenue and more than 90% of its operating income.

But let's look at each brand's performance in more are detail.

For the UGG brand, as I mentioned, we believe that the extended period of warm weather throughout the first quarter has adversely impacted cold weather UGG brand boot sales.

However, we also believe that the brand continues to make important inroads, developing a more meaningful spring season business.

I think it is helpful to look at the Q1 performance of the casual spring footwear and boots separately from the cold weather boots, as there was a meaningful difference between the two categories.

Our expanded spring line of sandals, sneakers, wedges, fabric boots and Mini Bailey Button did very well across each of the channels, including wholesale, where spring styles were up close to 20% and have continued to gain important shelf space.

Speaking specifically about the domestic wholesale channel, the growth in spring styles and men's was offset by a decline in cold weather boot sales.

January and February are typically big boot months at retail, but as a result of the mild temperatures in many parts of the country boot orders were down year-over-year.

With regard to fall, we are close to completing the prebook period, and overall we are pleased with the current level of commitments from our domestic wholesale accounts.

Slippers, classics, fashion, casual boots, sneakers and casuals all booked well.

Coming off a warm winter, retailers in general typically take a cautious approach to next season at this point in the year.

So while they open to buy dollar pool has contracted a bit, based the on conversations with our retailers we believe the UGG brand's percentage of the total open to buy dollar pool has not diminished, and that the brand, especially in the back half of the year, remains as important if not more important to the retailers with whom we do business.

Consumers will get their first glimpse of the fall collection at retail as early as June and July, which will include the first fall styles of new sneakers, casuals and boots.

But as a reminder, the UGG brand's primary selling season at retail typically doesn't get underway until later in the year, hitting peak velocity at November and December.

In terms of wholesale distribution this year, not a lot has changed.

We continue to deploy the same strategy that we have in the past, which is to selectively add accounts that we believe make sense for the brand at this point in its growth cycle, with the particular focus on areas where the brand is underpenetrated.

At the same time we are closing accounts that unable to merchandise our broader offering and support the brand's lifestyle position.

In 2011 we increased our net independent door counts by about 1% of the total door count, two-thirdsof which were open in the South and Midwest where we are underpenetrated, And approximately one third of them were either men's or kids' only accounts.

For 2012 our domestic independent door count is expect to be up at a lesser rate.

Outside the US, the UGG brand sales in Europe were slightly lower than expected.

The economic conditions in the UK, which is our biggest international market, remain challenging, and weather for the most part has not been conducive to boot sales.

While we believe that the summer Olympics and the year long Queen's Jubilee celebration will provide a boost to the UK economy, this is not incorporated into our planning, and we remain cautious on our outlook until there are more concrete signs of a prolonged recovery.

We are pleased with how the transition to a wholesale model continues to unfold.

The UK market in the past has been dependent primarily on classics and knit boots.

After rationalizing our account base, we have been working directly with the retailers to expand their assortments beyond our core classic collection and develop a sustainable business.

Part of this multiyear process involves marketing investments to increase awareness of the broader product line and enhance the consumer perception of the brand.

We see long-term opportunity to steadily grow the busy by increasing wholesale shelf space through new product introductions and the continued rollout of our own retail stores.

The goal is to develop slippers, cold weather, casual men's and kids' businesses much like we have in the US.

While not immune to some of the same issues as the UK, particularly the warm weather, Benelux, our second largest international market, has a very good first quarter.

The difference in performance between these two key markets lies in the approach our former distributors took to growing their business.

The bottom line is the UGG brand is more involved in Benelux thanks to a much wider selection of product, including a broader offering of spring styles.

The rest of Western Europe is facing similar economic challenges.

In addition, it also experienced a warmer than usual winter, so it is not a surprise that we are seeing some conservatism from the European distributors, which is reflected in our second quarter guidance.

We still view Europe -- particularly Northern Europe -- as having an ideal year round climate for UGG brand products and believe the current softness is more macro related and not indicative of the brand's appeal and long term growth prospects.

Meanwhile our UGG brand business in Asia grew at a fairly rapid pace during the first quarter.

Our wholesale performance in Japan has continued the rebound following last spring's earthquake and tsunami, and we are making good headway broadening the assortment of product available at retail.

With regard to China, we are pleased to announced that recently acquired the minority interest in our joint venture in order to capitalize on the significant opportunities there.

Our partner has been tremendously helpful in assisting with the successful launch of the brand in this very important market, and we'll obviously maintain a close relationship with them going forward, as they are one of our key manufacturing partners.

Shifting to channels now.

We believe that the sell through results in our consumer direct division showed a strong correlation to the temperature.

We saw increased demand for the UGG brand spring styles in our stores, while boot sales were mixed depending on the location.

Comp store sales were flat versus a year-ago, with a high single digit comp gain in the US, which comes on top of a double digit comp in Q1 of last year, offsetby softness in our international comp store sales.

Performance in the US differed by region.

In the Northeast, where the weather was unseasonably warm, our stores have not performed as well, while stores and locations experiencing more normal weather patterns did better.

In Asia, comps were impacted by weather as well, as well as some cannibalization from new store openings, and also due to the Chinese new year that was one month earlier this year, which impacts the buying cycle there.

In the UK, it was a mix of weather and the challenging retail environment.

E-commerce sales in total were down 7.5%, with the strong gain in Teva brand sales offset by high single digit decline in UGG brand sale.

For the UGG brand we experienced a decline in traffic, partially offset by an increase in conversion rates.

In terms of top performers, our men's business did well, led by triple digit increases in sneakers and casuals, followed by strong gains in sandals and slippers.

Kids' business also performed nicely across the board.

With regard to women's, increased sales in fashion, sandals, slippers, fabric boots and hand bags offset by softness in cold weather boots and classics.

It's worth noting that we were up against a tough comparison from last January when we filled a large amount of back orders for the Classic Short Sparkles following the style's inclusion in Oprah's favorite things episode in December of 2010.

Throughout the quarter we did see spikes in boot sales on days where temperatures were more season.

Unfortunately those days were few and far between during the first three months of the year.

Now, to the Sanuk brand, which continued its rapid growth trajectory in the first quarter, driven by increased demand for its expanded line of men's and women's shoes and sandals.

In addition to healthy growth within its core channel, the brand has made good progress building distribution, with several marquise retailers including Nordstrom, Zappos, Journeys and Dillards to name a few.

The product is resonating very well, with a broader cross-section of consumers, and we are also excited about the rapid growth trajectory.

The Teva brand had record domestic wholesale and growth in domestic e-commerce sales that offset by a decline in international wholesale sales.

The brand showed further evidence of its successful evolution as a year round adventure brand during the first quarter, as sales of closed toe footwear increased 38%.

Another highlight was the launch of the Teva brand in Japan through our existing subsidiary.

Retail and consumer reception for the brand and product line has been very positive.

Unfortunately, the overhang from a wet summer in Europe and the mild winter in both the US and Europe, along with the struggling EU economy, has left many of our retail partners with more goods than usual for this time of year, which is impacting current open to buy dollars.

So while sell through for the Teva brand has been good, we aren't yet fully seeing that translate into reorders in the near term.

It has also had a meaningful impact on fall demand.

For the first time in a long time,outdoor retailers packed up the fall 2011 goods to hold for next season, with only the top performing SKUs receiving commitments that the point.

So despite being named gear of the show at Outdoor Retailer in January, the current selling environment has forced us to reduced the Teva brand's projections for the year.

With that, I will now turn it over to Zohar.

Thanks, Angel.

Regarding shift in prices, in recent discussions with suppliers, we continue to hear that prices are coming down from their historic highs.

However, we will not know to what extent our full year 2013 product costs will look like compared to 2012 until we lock in prices for the full 2013 line, which will be in October around the time we report our third quarter results.

At this point we point we think it will be helpful to briefly discuss the dynamics of our sheepskin supply chain and outline what has been impacting the price.

To start, sheepskin is byproduct of the meat industry.

And in addition, there are different grades of sheepskin.

We primarily use premium sheepskin sourced from Australia in the production of our classic collection, with a modest amount coming from the UK and US.

Unfortunately, not all sheep are created equal.

The quality of skins from most other countries does not meet our high standards and therefore cannot be utilized.

There are number of things that impact the price of sheepskin.

We believe a big reason for the recent spike has been increased demand for this limited commodity, something to which we have certainly contributed.

The decline in herd sizes has also driven up the price, as worldwide consumption of lamb has been on the decline for many years.

Droughts in Australia in recent years have also a factor in herd declines, and the price of wool is also part of the story.

When that commodity appreciates, farmers are more likely to keep their sheep in order to hair harvest the wool.

Finally, changes in the strength of the Australian dollar versus the US dollar also impacts our costs.

As I mentioned a moment ago, sheepskin prices is starting to decline.

We think many of the other players that were utilizing sheepskin in their product lines have exited market due to the rising price.

It also appears that herd sizes are starting to grow again as a result of the recent wet winter in so Australia.

While the decline in the sheepskin price is no doubt a positive for our future results, it is important to note the ratio between the changes in the published price of sheepskin and what we ultimately pay is not a one-to-one.

There are two reasons for that.

The first being the different grades of sheepskin.

As I said before, we primarily use premium sheepskin, the price of which has appreciated faster than the lower grade sheepskin that are also bought and sold in the open market.

This means not all sheepskin prices move in direct correlation with one another.

Secondly, while our skins are sourced from Australia and to a lesser extent the US and the UK, they are all treated at tanneries in China, and it is from the tanneries that we actually purchase our raw materials.

There are additional costs that go into the processing of the skin as well the profit built in by the tannery.

So a 10% decrease in raw sheepskin prices does not necessarily mean a 10% decrease in our costs.

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 includes increasing the mix of non-sheepskin products, new footwear materials and new production technologies, increasing direct shipments to retailers, and taking advantage of lower cost sourcing in areas like Vietnam, El Salvador, Central China, as well as the US.

Tom will now go through the Q1 financials and updated guidance.

Tom?

Thanks, Zohar.

Before I get into that I wanted to clarify a typo in the press release.

Under second quarter outlook, our sales earnings margin guidances in that press release are correct, but the SG&A rate is incorrect.

SG&A rate should be 63% versus the 37% in the press release.

And regarding the rest of my discussion today, the release contains a good amount of the detail about our first quarter sales and earnings, including sales by brand, channel and geography.

Therefore I'm going to limit my discussion primarily to gross margins, operating expenses, the balance sheet and guidance, as well as some additional commentary on our retail division.

Regarding gross margin for the first quarter, it was 46% compared to 50% in the first quarter of last year.

Of the 400 basis point decline, approximately 300 basis points are attributable to an increase in product cost, while higher closeout sales, markdowns, discounts and direct to consumer mix contributed approximately 200 basis points to the decline.

This was partially offset by the consideration of Sanuk brand and increased pricing.

Increased closeouts relative to the prior year were primarily attributable to discontinued spring and fall styles.

As to the short fall versus our guidance, this was mostly due to lower margins on the Teva brand and the other brands, driven by increased closeouts, as well as increased closeouts -- increased UGG brand closeouts.

Sanuk brand margins were ahead of expectations.

Total SG&A expense for the quarter was $101.4 million or 41.2% of net sales, compared to $74.3 million or 36.3% of net sales a year ago.

SG&A increased primarily to -- due to the additional expenses of owning and operating the Sanuk brand, including $8.7 million of operating expenses, which includes $3.1 million in amortization of intangible assets and purchase price accounting tied to the Sanuk brand earn-out payment.

SG&A is also up approximately $8.5 million due to the growth of our retail organization.

In addition to having 19 new retail stores that were not open during the first quarter of last year, we are investing in personnel and infrastructure to support a more aggressive store rollout plan, as we plan to build towards the base of approximately 200 stores by the end of 2015.

In addition, we had an increase of approximately $4.7 million in marketing, primarily related to the UGG men's and classic campaigns.

With 46 stores now open in and our plans for 70 by year end, we want to provide some more insight into our store operations and share some additional metrics.

We will start with the comp base.

In the first quarter the comp bases consisted of 27 stores, up from 24 in Q4 after adding Madison Avenue, Las Vegas, and Los Angeles.

Of the 27 stores in the comp, 18 are in the US -- Boston is the only US store that isn't in there -- four are in the UK, four are in China, and one is in Japan.

With regard to the 19 non-comp stores, many of these are in Asia where the locations are typically a third smaller than the US and European stores and therefore sales per store lower.

We believe that this, along with investments in infrastructure to support the larger store rollout, is the reason our reported retail segment estimated new store productivity appears to be declining.

However, in aggregate, sales per square foot in four wall margins for Asia stores are on par with the Company's very high average.

Looking over the rest of the year, our plan calls for approximately 24 new store openings, with a few in Q2 and the remainder broken down fairly evenly between Q3 and Q4.

Roughly four will be in the US, with approximately 10 each in Europe and Asia, and includes some notable shopping destinations such as Le Marais in Paris, Piccadilly in London, and New York's Meatpacking District.

We are also doubling the size of the Madison Avenue store to accommodate more women's product as well as the buildout of our first ever men's only store.

The majority will be concept stores, along with handful of boutiques and outlets.

Back to our results.

Operating income for the first quarter was $11.9 million or 4.8% of sales, compared to operating income of $28.2 million or 13.8% of sales last year.

The decline in operating margin was the result of the lower gross margins and the aforementioned expenses for the expansion of our retail and international organizations.

Our effective income tax rate for the first quarter was 34.9%, compared to 30% in the first quarter last year.

The higher tax rate was due to a one-time tax expense associated with our joint venture in China, and to a lesser extent a higher concentration of domestic pretax profits versus a year ago.

As reported in our release, first quarter diluted earnings per share were $0.20.

The shortfall relative it our guidance was $0.04, with $0.01 due to taxes and the remaining $0.03 attributable to the negative margin effect from increased closeouts, and channel mix being partially offset by lower operating expenses and leverage from higher sales versus our projections.

Now turning to the balance sheet.

At March 31, 2012, inventory increased 94.6% to $208.5 million from $107.1 million at March 31, 2011, and decreased 17.7% from $253.3 million at December 31, 2011.

By brand, compared to March 31, 2011, UGG brand inventory increased $90.1 million to $159 million.

Teva brand inventory increased $0.1 million to $30.8 million.

And our other brands inventory decreased $0.9 million to $6.6 million.

Sanuk brand inventory was $12.1 million at March 31, 2012.

The $101.4 million increase in inventory is primarily attributed to the growth of fall 2012 UGG brand inventory, including the growth of our consumer direct division, carryover product from the 2011 holiday period which were utilized to fulfill orders during 2012, and an increase in product costs and the addition of Sanuk brand.

I would like to provide more detail regarding our comfort with the quality of our UGG brand inventory.

At March 31, 2012, current fall inventory represented approximately 65% of the total inventory, up from 57% a year ago.

And although absolute increase in fall inventory is approximately $65 million, approximately $50 million of increase is in classics and slippers, for which we have orders to sell at full price.

In addition, we have approximately an $10 million increase in cold weather product, which has been sold for delivery in later quarters.

Another perspective to review the $90 million UGG inventory increase is as follows.

Approximately $40 million being attributable to product cost increases and carryover inventory from 2011.

Approximately $20 million of increased European inventory to support the direct business.

Approximately $20 million of spring and other inventory, with the balance of increase of approximately $10 million of additional retail store inventory to support the newly opened stores.

We still anticipate year-over-year inventory growth to decline, mostly in the back half of the year as we sell the carryover inventory.

During the quarter we repurchased approximately 274,000 shares of the Company's common stock for a total of $20 million.

As of March 31, 2012, we have $80 million available under the $100 million stock repurchase program authorized by the Board of Directors this past February.

Taking into account the stock repurchase program and our projected capital expenditures, we anticipate ending 2012 with a strong cash position driven primarily by cash flow generated from operations.

Now moving on our outlook.

Based on the first quarter results and current visibility, which now includes lower projections for our international wholesale operations as well as reduction in Teva brand domestic sales, we now expect 2012 revenues to increase approximately 14% over 2011 levels, compared to our previous expectation of 15%.

For the full year we now expect UGG brand sales to increase by approximately 10% versus our previous guidance of approximately 11%, due to a lower international wholesale and distributor consideration.

Teva brand sales are now expected to grow in the low to mid single digit range, compared to prior guidance of approximately 10%.

Combined sales of other brands are expected to be down approximately 15%.

Sanuk brand sales are still expected to be approximately $90 million.

With regard to earnings, we do not expect diluted earnings per share to decrease approximately 9% to 10% below 2011, compared to our previous guidance of approximately flat.

Forecast now based on a full year gross profit margin decline of 250 basis points from 2011, compared to prior guidance which has been a decline of 200 basis points.

The additional decline is due to lower international sales and increasing Q1 closeouts.

SG&A as a percentage of sales is expected to be approximately 30%, versus the earlier guidance at 29%, due to lower sales, while our tax rate is still forecasted to be approximately 31%.

As a reminder, our SG&A projection includes $13 million or $0.23 per diluted share associate with amortization and [accretion] expenses related to the Sanuk acquisition.

For the year we expect capital expenditures to be around $80 million, compared to the prior projection of $90 million, with roughly $32 million allocated to the construction of our new head quarters, $26 million for the new store openings as well as store and showroom remodels, $10 million going to IT and maintenance projects,$4 million today's upgrade the retail operating system, and the remaining $8 million for additional corporate infrastructure.

For the second quarter 2012 [given the reduction] in European distributor sales, we expect revenues to increase 8% over second quarter 2011 levels, with a diluted loss per share of approximately $0.60.

This guidance assumes a gross margin of approximately 43% and SG&A as a percentage of sales of approximately 63%.

Included in our SG&A projection is roughly $3.5 million or $0.06 per diluted share in expenses related to the amortization and accretion expenses related to the Sanuk brand acquisition.

I will now turn the call back over Angel.

Thanks, Tom.

In light of the many challenges we faced, I'm pleased with how our team has executed during the first quarter.

We are managing this business for the long-term, and I'm very confident that the growth strategies we developed for our brand portfolio are intact and will continue to deliver consistent sales and earnings improvement over the years ahead.

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

(Operator Instructions).

Your first question from Bob Drbul with Barclays Capital.

Hi, guys.

Good afternoon.

Good evening.

Good afternoon.

The first question I have, one of the comments that you made around the UGG brand was that you thought that the inventory levels, I think both at retail and in your business, would be clean by fall.

Elaborate a little bit more in terms of what gives you the confidence around that statement, and what you are seeing that we might not be seeing?

Well, the bulk of the product is product that, as Tom said, has been committed to for fall.

It is in-line inventory.

Our sell through of that product was impacted most by cold weather.

The cold weather product.

Some classic product.

Those products don't see seasonal changes in fashion.

Those products are consistent year and year, and we have sold those products and adjusted our incoming orders accordingly.

Okay.

All right.

That helps.

And then I guess like bigger picture a little bit.

When you think about over the last few months what would you say would be the biggest positive developments or negative developments that you have seen as you have worked through the current situation?

Well, the biggest negative is weather obviously.

No one expected that we would take such a swing from 2010 winter to 2011 winter.

The two things were at opposite extremes.

So ifyou had retailers buying to a sell-through level in 2010 when way until spring about was still cold and snowy in some places, all the way to the opposite of that.

So who -- that is a real swing.

The positive has been the way the brand has held its own.

Particularly as you look at the sell-through of our spring line, the spring product has been checking extremely well.

Men's business has been performing well.

The kids business has been performing well.

So the only places that we have struggled is really where there is a real seasonal impact to the weather.

And if you look at overall, our sales were up 5% without Sanuk, so that is a good performance company-wide in this environment.

Okay.

And then I guess the last question I have is can you elaborate a little more on your own stores in Asia in terms of the performance there?

Well, those stores performed well.

Weather was an impact in Asia, the same way it was in Europe and the US.

But generally speaking, our stores in Asia performed quite well.

The brand continues to evolve very nicely.

The consumer environment for this kind of product continues to develop.

And we are quite bullish on, as you can see from the acquisition of our sub -- the JV, that we feel that there is significant growth opportunity inAsia.

Great.

Thanks very much.

Good luck.

Thank you.

From ISI Group we will go to Omar Saad.

Thanks.

Good afternoon.

Could you give us a little more clarity in the puts and takes in the gross margin shortfall, kind of like it was primarily due to higher than expected closeouts in Teva and other brands and UGG.

What was the breakdown?

Was it mostly Teva closeouts or UGG closeouts or other brand closeouts?How do we think about that gross margin piece there [at the end of the] quarter?

It was split fairly equally between Teva and the other brands being down versus UGG.

The 200 basis points decline is fairly evenly -- one subset of the UGG gross margin number is that we had a negative impact on margin due you to the channel mix.

Our e-commerce sales, to a lesser extent our retail sales, didn't perform relative to expectation, so that had a negative impact be on margin as well.

And did that mostly come toward the end of the quarter?

Because I think about when you gave your guidance with five or six weeks left in the quarter, was there a decision made toward the end of the quarter saying, hey, we need to close out some of this product?

Is that a fair statement?

Yes, it was -- there's -- it sort of evolves over the course of the quarter.

You look at your inventory levels, you see your end -- as a matter of standard practice your end discussions relative to closeouts over the course of the quarter, and many of those discussions conclude towards the back half -- the third month of the quarter.

So that is sort of how that progresses.

And we felt given our inventory levels and the manner we were going to close out some of that, it was non-classic product for the most part, we felt it was appropriate to go ahead and make that decision.

And then, Angel, could you talk about the order book a little bit?

It sounds like despite what you described correctly as a really warm winter against last year was a really cold winter, the order book being pretty good.

What gives you -- can you give us detail behind it?

What you are hearing from retailers?What gives you confidence in that full year revenue number you are putting out there?

We are pretty happy with the order book as it stands now.

We are just about done with the prebook, maybe 95% of the way there.

All indications are very good.

And particularly new product.

Especially men's, kids'.

Some of the new fashion product has been very well received.

So it is an evolving brand.

We can see the pattern continuing, less dependence on what we would call a traditional classic product and more evolution of that product.

I think we've done a good job of mitigating the sheepskin impact with diversity of design and that should allow us to make sure that we are operating the at the right price point.

Retailers seem to be satisfied for the price points that we are putting out there for the fashion products.

I'm feeling pretty bullish on the response that we have had to the fall sell-in at this point.

Okay, great.

Thanks, guys.

Good luck.

Thank you.

From Jefferies we will go to Taposh Bari.

Hi, how are you doing.

Can you -- I just wanted to follow up on fall-winter backlog.

You said was up 15% as of last quarter.

Can you tell us what that number is as it stands today?

We normally, in terms of reporting backlog -- at the end of the first quarter there is going to be still obviously spring product in there.

It's going to have fall product in there as well.

So it is a little bit of a mixed bag.

It has Sanuk this year.

It didn't have Sanuk last year.

So we're will stick to reporting total backlog just on an annual basis.

Okay.

The domestic comp, appreciate the disclosure there.

So up high single digits in the first quarter.

Can you give us a sense -- so your overall comp was flat in the first quarter and up 1% in the fourth quarter?Can you give us a sense of what that domestic business looked like in the fourth quarter, just so we can get context around what high single digits means?

Are you referring to the guidance for the total year 2012?

No, Tom, I wanted -- I was curious to know if you are willing to disclose what the domestic same store sales growth was in the fourth quarter of 2011.

No, it -- we are already starting to expand some of our disclosures relative to retail, but we really don't want to get back into the prior quarter and get into the detailed of prior quarters right now.

Okay, that is fair.

Then just a final question I had was on the second quarter guidance.

So if I recall last year the second quarter had a pretty massive -- as you went vertical or took over your distributors internationally, there was a massive shift out of 2Q into 3Q and 4Q?

Can you just give us a sense of why sales would only be up 8% in the second quarter?

And then also on the second quarter guidance why -- it seems like you are modeling gross margins up.

Just trying to get a sense of what is driving that.

I'm assuming it is probably a lack of sheepskin in the product mix, but anything else to read into that?

The second quarter we -- consistent with the total year, we've got some pressures from the European business and included in that is pressures from the European distributor business.

Those expectations now in the second quarter are lower than originally expected, so that have is having some impact on the growth.

And you -- are on the margin, it is approximately the same as the prior year, but there is less of an impact on this -- from the sheepskin on cost increases in the second quarter than there is in the back half of the year.

When there is a little bit of positive impact from Sanuk as well in the second quarter.

And I just wanted to ask one final question, kind of holistically as it relates to guidance.

Looking back to the fourth quarter, you gave guidance very late in the first quarter, and it seems like, I guess following up on Omar's question, it sounds like there were closeouts kind of unexpected as of the time of guidance.

As we look out now -- a lot of this noise is coming from weather presumably, but as we look out new into 2Q through 4Q, where do you see the risk?

Is it all kind of macro at this point?

But if you can justelaborate on what can go wrong, what can go right from here on out versus your guidance.

Thanks.

I think it is primarily macro.

As Tom mentioned, we are facing some headwinds in Europe, the UK being our biggest market, and that market is struggling from a consumer perspective.

So we are going to battle very hard in that market.

We think that we have gotten ahead of the issues that weather created in the last -- this past quarter.

We think inventories, as we said earlier, are going to be if fine shape by the end of the year.

And we are getting great response to the fall assortment.

So it is just managing the business effectively.

And I think we have proven that we can do that.

It is when you get thrown these nature's curve balls that things have a way of going south on you.

Thanks a lot, guys.

Best of luck.

Thank you.

And next we will go to Jeff Klinefelter with Piper Jaffrey.

Yes, thank you.

Just a couple of questions.

Angel, in terms of the international markets, can you give us a sense for -- on a wholesale equivalent basis -- where the UK versus Benelux and the rest of the Western European exposure kind of tracking -- or tracked in Q4 on a year-over-year -- or Q1 rather on a year-over-year basis?

And what are your assumptions for that trend for the balance of the year?

Well, as I said, the macro environment we can't do much about, so we are looking at as I think was mentioned in the -- as I mentioned in the script, the Queen's Jubilee and the Olympics should provide a boost to the UK economy.

And getting consumers into more of a consumption mode as well as an influx of a million tourists or more.

So that should help.

Benelux, as compared to the UK, has been good at managing the development of the brand.

When the brand was evolved fully across multiple categories of product versus it being more one dimensional as the UK brand evolved through the recent distributor relation, that brand has a stronger foundation and can move in a variety of different directions, depending on weather, depending on fashion.

The brand is more flexible and more pliable.

So we are aggressively moving toward the evolution of the brand in the UK.

We have right sized the distribution matrix, and in those retailers that are continuing to do business with us the goal is to expand the assortment very consistent with the way you have seen us do that here in the United States.

So that we are not as one dimensional a brand as we have been, and so that cold weather if and when it does or does not occur, is not the primary factor are in whether the brand performs at the expected rate.

So it is really a function of brand evolution and focused category development in both of those markets.

Okay.

So would it be -- would you view it as a -- for a second half year-over-year, is it going to be a neutral environment?

Look for more of a consolidation of distribution so that it is a decline year-over-year?

Just getting a sense for how you are planning that international business year-over-year.

I see it as a neutral environment with a positive -- with the potential upside based on the Olympics and the Queen's Jubilee.

And --

Okay, that's helpful.

And if we get an improvement in macro environment influences, we are going to benefit even more.

Okay, that is helpful, thank you.

In terms of our overall fall bookings, or second half booking -- and if I missed this, I apologize, but what is the ASP, average selling price, in the fall book year-over-year at this point?

It will be up probably slightly, and that is primarily due to the price increases that we have taken on product that is primarily sheepskin.

So you will see probably some higher ASPs.

We have tried to counterbalance that with, as I mentioned earlier, some evolution of non-sheepskin and sheepskin that is engineered to be less of the total percentage of the upper on some of the fashion product.

But generally he speaking my guess is it will be up a few ticks.

Okay.

Up maybe slightly, but not up to the rate it has been up the last couple of years?Is that fair?

I think that is probably fair, yes.

Okay.

Just lastly, in terms of spring, you commented about the strength of the spring sell-throughs versus kind of that boot carryover business.

Can you give us a sense for what maybe even this year or maybe a more normalized year, what would the split within the UGG brand be of carryover sales versus new spring product in Q1?

Well, that has been evolving rapidly, as you know, the last few years.

Let me -- I'm going to take a guess at it.

40% would be spring new -- I mean, 60% would be spring new product, 40% would be carryover?

Just a rough ballpark guess, and I think as time goes on you will see that move more toward spring only assortment versus carryover styles.

Thank you very much.

Thanks.

And next we will go to Diana Katz with Lazard Capital Markets.

Hi.

My first question is are you seeing any price resistance on the new -- on the classic tall and triple Bailey that have already hit the stores now?

No, we are really not.

Not seeing any indication, and we have been doing some consumer research on that front as wellin addition to any input we are getting from retailers.

So, no, we have not seen any price resistance from consumers.

Okay.

And then, Angel, you mentioned that for your prebooks there is less dependence on traditional classic product.

So have you seen a growth in the percentage contribution of fashion versus core product for the upcoming season?

Yes, we have.

The fashion line has continued to evolve.

Tor many years now -- well, at least the last four years -- we have been consciously keeping our classic assortment pretty flat as a percentage of total, because that forces us to develop more aggressively some of fashion products, some of the product that is not as sheepskin dependent.

Especially last year when we saw that there would be a significant potential impact in sheepskin pricing.

As you know, last year was 30% increase and followed by 40%.

So we have been very aggressive about the evolution of the fashion component of our -- we call it fashion.

It is really non-classic styles for fall.

Still some sheepskin, but you how we use the sheepskin varies, and that continues to develop.

As I said, the fall 2012 assortment for fashion has been very well receive.

Okay.

And then, Tom, as we dig through the model, what is your assumption for retail comps this year, the blended rate as well as the domestic versus international comps?

And where do you think e-commerce will shake out this year?

For the comp assumption, really for the total year, is still really unchanged.

It's a mid to high-ish single digit comp for the total year, and we really didn't give breakout a domestic versus international.

And on the e-commerce side of the business, we are still pretty consistent with our expectations there in spite of the first quarter, [and the] total year -- and now it is a global number -- we still think our earlier guidance of roughly 20% to 21% still holds for that.

Okay.

And then so the takedown numbers today was purely -- on the UGG side was purely on the international wholesale side?

It is not just international wholesale.

There's also the international distributor business, and that had a big impact on the second quarter, given the distributor sales are second and third quarter items.

So it was both distributor and wholesale, and it was international and it was Europe.

Okay.

So I guess what gives you the confidence in your comp -- in your retail comp assumptions for the back half, that there will be this acceleration?

The similar things that we've talked about before.

In the UK we have got the Jubilee as well as the Olympics, and in Asia we have got some more marketing investment there and some more management infrastructure investment to drive those sales.

We have got a broader product assortment that early indications are is going to do very, very well.

We have got -- we mentioned earlier about the new IT system to be able to track our inventory levels.

We feel really good about that.

In Japan, we had the tough comparison with the earthquake and the tsunami and the nuclear meltdown, and we feel really -- still really strong where we are headed with our retail business and where that is going to end up for the year.

And next we will hear from Mitch Kummetz with Robert W.

Baird.

Thank you.

Thanks for taking my question.

So first, I know you guys don't want to give backlog as of end of Q1.

It is not your policy.

But in light of the commentary that you are encouraged by the fall orders and that order book is pretty close to complete, I mean can you say whether or not all -- excuse me, UGG fall orders prebook orders are up, are they down, are they flat?

Can you give us just a general sense as to how that order book has come in?

All I can say or are will say is we are satisfied with the way the order book is coming in.

It's meeting our expectations.

So that is all I can say.

Okay.

I guess it is just a little tough, because we don't really no what your expectations were, so I can appreciate that --

I don't go into a season with negative expectations, justas a general rule of thumb.

Okay.

That's helpful then.

And then, Tom, I know -- so you updated your assumptions -- your sales assumptions by brand, and then kind inform response to Diana's question you talked about it by channel.

Could you just tell us what you are thinking by region now?

I think previously you were talking about international up over 20%, I think growing to 33% of total sales.

And I think you were saying the domestic up low double digits.

Are those -- it sounds like the international piece has come down, right?

International has come down, and the domestic has come up some relative to prior guidance.

Okay.

So does that mean low teens, mid teens on the domestic?

And mid teens on the international?

Can you gives us maybe some more specifics on that?

On the international in total more of a mid teens now versus the 20% before.

And the -- on the domestic side, domestic business should be up in the mid teens as well.

A little bit higher rate than the total international business now.

Okay.

That's helpful.

And then on the inventory when -- Tom, when you were running through the buckets on the $90 million increase in UGG, I think you said $40 million was a combination of higher costs and then carryover.

I was hoping you could break that out.

How much of the $40 million is cost increases versus carryover?

Look at that $40 million, the -- whereas at the end of the year it was is more of an equal split.

Now as we are bringing more of the fall 2012 inventory at a higher cost, more of that $40 million now is related to product cost increases versus the carryover now.

Okay.

That's helpful -- okay.

That's helpful.

Maybe this as a last question.

As you guys are thinking about the back half of the year, you are going up against what I would consider to be a relatively easy Q4 comparison, where last year reorders were weak, cancellations were up, DTC performance was hurt by weather.

Kind of what is assumed in your guidance at this point for Q4, given that easy comparison?

And how are you planning to manage the inventory to maybe take advantage of some opportunities in case the weather is more cooperative, and the reorders come in, the cancellations come down, and the comps in your own stores accelerate off of last year?

In terms of the relative to the back half of the year there is really -- in terms of our guidance we really haven't seen -- assumed much of a change at all in the current weather.

That being said, at the same time we are managing our inventory to be able to have some opportunity to be able to chase some business in season, and [so we] feel pretty pleased about that.

So and obviously if we get better retail comps and e-commerce picks up, we obviously are going to make sure we allocated at full inventory levels to those two channels.

Okay.

But again, to be clear, in terms of your sales and earnings guidance, you are not assuming some big uptick in Q4 on normal -- on more normal weather.

Is that fair?

I think I -- what I can say, relative to the third and fourth quarter, I mean comparing those two quarters, there is more growth in the fourth quarter assumed than there is in the third quarter, because there is a lot more retail stores in place then, the e-commerce content there in the fourth quarter.

The third quarter got hurt by some of the European distributor business as we lower the those expectations.

Yes.

Okay.

That's helpful.

Thanks.

Good luck.

Next we will go to Howard Tubin with RBC Capital Markets.

Hello, guys.

Thanks very much.

Would you say, looking at the direct distribution model now from the UK, other than kind of the macro issues and the weather, is that -- would you say that is on track as delivering kind of all the potential [and] upside and giving you everything you wanted from going direct in the UK?

I think the most important thing in going direct is that we have control over the way the brand evolves.

Not only from the product perspective and the placement of the different categories of product, but also the way in which it is distributed.

Where you find our product, the mix of shop in shop.

The mix of our own stores, the shop in shop as well as within key retailers a much better presentation of the assortment.

In addition to that, the marketing.

It is really a brand building exercise that we launched in the UK, and it is working.

Keep in mind that we have shed some distribution, and so we are shedding distribution where we didn't feel it was taking the brand where we needed to be in the long run and making up for that by getting increased spread and assortment where we do need to be, including our own stores.

So it is really the only way in which we can assure the long-term success of the brand is to really take control of where it is placed, how it looks and how it is marketed to consumers.

Okay, thanks.

Next we will hear from Chris Svezia with Susquehanna Financial Group.

Good afternoon, everyone.

I guess first I just want to clarify, just on the Teva brand can you [just maybe] walk through why the softness in Q1 at US wholesale, just assuming the weather and additional sell-in et cetera would have been better?

I'm just curious why -- remind me -- I want to understand why it was so soft.

Yes, Chris, I mean, in the United States Teva, a good amount of its distribution is through channels that also carry cold weather product.

And with the unseasonably warm weather, those retailers were carrying a bigger inventory investment than originally thought of, and as a result of that they had less money available to do Teva reorders in the first quarter.

So that is primarily what -- how weather impacted the first quarter Teva business.

Okay.

I see.

I got you.

And then just on when you were looking at the domestic revenues for the year, and seemed like an answer [prior] question, a slight uptick in the fall process, sort of in a mid teens growth rate from the 11% or 12% growth rate previously.

What is the change?

Where is that coming from.

Is it coming from Sanuk.

Is it coming from something in UGG?

I'm just curious.

It is coming from -- or really just as we have virtually completed the fall order book and our confidence level where the order book stands relative to where we were when we reported the third week of February, it is our increased confidence relative to the wholesale business.

Sanuk, we held our total guidance for the year on Sanuk, albeit we are pretty [special] where that is headed.

But it just our -- just increased confidence relative to the third quarter and fourth quarter on our domestic UGG wholesale business that drives us to more comfort to elevate that number.

Okay.

That's I guess that's pretty good to hear.

And then just when you are thinking about the back half and what you are anticipating from, and no one can predict the weather, but are you anticipating that you have a normalized winter season?

Are you anticipating a continued uncertainty and kind of somewhat an unusually warm winter as you go into the back half?

I know it's hard to predict here, but just your thoughts on how you might be thinking about that?

I think we are really -- we talked about that on an earlier question.

It is tough to predict the weather.

We have obviously had a lot of good discussions with our retailers, and formulated the order book.

I think if we get some colder weather relative to what we've -- what the normal weather pattern would be, there is an opportunity for some upside and we would have the inventory, especially in the retail and e-commerce business to be able to chase that.

Okay.

The very last question I have I guess for you, Tom, here is when you think about the back half, and your comment about obviously seems like most of the growth is going to be fourth quarter weighted, canwe think from an earnings perspective the majority of the growth is going to be fourth quarter weighted, just given the cost, given probably some softness on the international side if Q3?Just kind of any thoughts around maybe what the earnings bias could be Q3, Q4 would be helpful.

I think that is a very good question.

Although we are not giving guidance for the individual quarters, but in the back half there is going to be strong growth in the fourth quarter and -- relative to the prior year.

And because of the cost pressures in the third quarter with sheepskin and [nets] the quarter, there is not as much offset from a retail perspective.

And now the pressures in Europe in the third quarter and international wholesale has better margins than domestic, and you could see the third quarter could be a down quarter relative to the prior year.

Okay.

Okay.

That's helpful.

Thank you very much, guys.

And next we will go to Scott Krasik with BB&T Capital.

Hi, thanks very much.

First a house keeping question.

Are you -- had you already been consolidating the results from the China JV, or are you bringing anything on to the income statement or the guidance from that?

We were previously consolidating those results, and then had a minority interest at the bottom that we would take away from net income.

So really in change in our sales and COGS and operating expenses.

Thanks.

And then just help me understand the Asian business a little bit better.

Are your distributors better capitalized than in Europe?

How much of it as retail business versus is a wholesale business?

And how do you view the flat comp?

I know you said that the weather was unseasonably warm.

What are the other factors that are impacting Asiathough?

Well -- Scott, this is Zohar.

The flat comps come from our own stores.

Our distributors in -- the bulk of our Asia business is done through direct, which is China and Japan.

Our business over there is not that big at all in the rest of the countries.

So I wouldn't say that they have any different capitalization than our distributors in Europe.

So then quantify -- so then within China and Japan, is the majority of the business done in your own retail stores, or you have big wholesale business there's as well?

In China there is no wholesale business.

It is all direct.

When we talk about the comps, all our China business is through the UGG retail stores.

In Japan the bulk of the business, or a good split is retails and wholesale.

And the health of the business in Japan right now?

It is improving.

We are pleated pleased to see the improvements we are seeing, especially in Q2.

Okay.

And then just because a lot of the weakness potentially in Europe is out of your hands, it is more macro driven, did you think about really ratcheting back your assumptions around that business for the back half of the year if it doesn't turn?

What gave you the confidence to take it down just slightly?

We will, we have good visibility now.

They have a good portion of their third quarter at this point in time prebooked.

The fourth quarter has always been highly dependent on reordersWe had another year under our belt in terms of developing that market.

So we took it down pretty reasonable amount, but at this point in time we think it is down to a level that we can meet the numbers.

Okay.

And just last, I'm sorry, on how you said the spring business was up meaningfully.

Can you quantify what your UGG spring business was up?

Well, the -- we have had sell-through of non-classic styles;the Mini Bailey button, the fabric uppered boots, sandals, et cetera, and in our own stores as well as our wholesalers, so I'm not going to get into more specifics than that other than we are quite pleased with that kind of growth that we are seeing.

Men's particularly has been up significantly.

Tom?

I'm looking, Scott, back through the script.

We did comment on all the spring styles, and just look at spring styles -- what is identified as a spring style, which is an expanding category.

And those were up close to 20%, and we gained some important shelf space.

Again, the first quarter is highly dependent on boot product as well, so that strong growth in spring styles was offset by the pressure relative to the colder weather product.

Right.

Most of that was probably Sanuk, but you are saying that it was strong across the board?

We had a good quarter with Sanuk.

Real pleased where that brand is headed.

But we had a good quarter with UGG spring styles.

Right.

I was referring to that point in time to UGG spring styles.

Yes, okay.

Thanks, guys.

And next we will go to Jim Duffy with Stifel Nicolaus.

Good afternoon.

Thanks.

A few places where I need some clarification.

Angel, maybe I heard you wrong, but I think you said in your prepared remarks, retail are open to buy for fall down, yourshare of that is the same?

That statement seemed to imply your UGG US fall bookings are down, yet that is inconsistent what I heard you say during the Q&A portion.

Help me get clarification here?

No, what I was referring to is given the warm winter open to buy based on sell -through is down for most retailers for those categories of products.

UGG's proportion of that open to buy pool has remained constant, from everything we can gather.

It might even be up a little bit.

Because what people do is they tend to go to those brands that are proven performers, and they tend to be more reticent to bring in brands that are not as proven.

So --

When you say proportion, you don't mean share, you mean dollars?

I mean dollars.

Okay.

That's helpful.

Thanks.

And then the international markets, you seem to be struggling in some of them.

Do you need to take steps backwards in your international markets to go forward?

Angel, I thought I heard you say your stores in Asia perform well.

Is it a typo in the press release where is says the Asia store comps were negative?

No.

Our store -- let me answer -- I don't believe for a minute that we need to go backwards.

I think we have been progressing at a fairly modest rate actually.

We have not grown our retail base outside you of the United States anywhere near as aggressively as we could have.

We have been building a foundation of operating excellence in each of these regions, and our core -- our performance across the board in Asia and in Europe has been extremely consistent and evolving nicely, with the exception of the impact of weather and, as we mentioned, the macro economic impact in Europe.

So we have generally speaking feel very good about the growth in our performance outside the United States.

Jim, as a follow-up to that also, when we talk about the performance, it's a relative performance, and all of the stores are still profitable and contributing nicely to the bottom line, as Angel indicated.

And you look at the comp, for example, in Japan, there was only one store in the comp and now we have 12?

You mean total Asia?

[It's now] like 12.

Right, but in Japan itself.

So the performance of -- we look at the overall performance [and this time in] China.

I see.

Okay.

Shifting gears a bit.

Zohar, I was intrigued by what you had to say about sheepskin costs.

You lock in in October.

Seems you are seeing better costs now.

Will there be opportunity to lock in sooner, or is there a structural reason why that is not possible.

No, you can lock sooner, but you might be at a disadvantage, because the biggest killing season is in Australia, and that starts in Q3.

So until then you don't really know what the prices are going to be.

So you are better off waiting and see what the price is, and that is how the suppliers are placing their prices upon.

Got it.

Okay.

Thanks, guys.

And your final question will come from Christian Buss with Credit Suisse.

Yes, I was wondering if I could get a little more color on the seasonality of the Sanuk business?

And then I have a follow-up after that.

The Sanuk business historically has been primarily a spring business, which normally is going to be more than 50% of the business, closer to 60% of their business is going to be in the first half.

We have seen good growth.

We can't report out a prior year first quarter number or second quarter number, because we didn't own the company at that point in time, so those requirements, we get into that.

But the back half, with the new initiatives we have there, we are expecting strong growth in the back half of the year as well this year.

Okay.

I'm trying to understand the second quarter guidance then.

It seems to imply that there is some continued struggles in the UGG business in the second quarter, and I'm wondering if you could provide some color into, given than we can't talk about weather as the hold-back in the spring summer season as much, what is leading to that softness and that weakness in the second quarter?

The UGG business in the second quarter is more of a reorder, a little bit of sell-in of some spring product.

It is about in June the Nordstrom anniversary sale.

So it normally is not that big in the scheme of things.

And then on Sanuk, we do have some good growth for sales for Sanuk in the second quarter.

And one thing to keep in mind, as I talked about earlier, our international distributor sales in Europe are down pretty significantly relative to the prior year.

Can you maybe help quantify that?

I mean, no.

We don't need to get into -- we have given you guys a decent amount of where we are headed for the second quarter and some of the salient detail in terms of from a modeling perspective.

Okay.

Thank you very much and best of luck.

All right.

Thanks.

Well, thank you all for your attention and participation in the call.

Clearly this quarter was not what we wanted.

However, as I mentioned earlier, I'm very confident our confident in our management's team ability to continue to develop our brand and to continue to drive sales and earnings growth in the remainder of the year.

So that is really our focus and our effort, and we are extremely committed to ongoing delivery of high shareholder value for this Company.

Thank you all.

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

We do thank everyone for your participation.