Deckers Outdoor Corp (DECK) 2012 Q2 法說會逐字稿

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

Welcome to the Deckers Outdoor Corporation second-quarter fiscal 2012 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 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 form 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 the future financial performance expected at the current time.

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

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

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

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

Please go ahead, sir.

Thanks, operator, and welcome to everyone joining us today.

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

We are encouraged by the sales trends we experienced in several areas of our business during the quarter.

Overall sales increased 13% over the second quarter last year versus our projection of 8%, as our direct-to-consumer channel delivered better-than-expected results.

This included a 7% comparable store sales increase on top of a 24% increase a year ago, and 40% growth of our e-commerce business.

We expect that our direct-to-consumer channel will be a key component of our future success, both in terms of growth opportunities and enhancing the valuable connection between our brands and consumers.

We took an important step toward strengthening this platform by appointing David Powers as President, Direct-to-Consumer.

He brings a vast amount of global experience to this newly created role, which encompasses both our e-commerce and retail operations.

This is critical as we continue to build out our store base, particularly in Asia and further evolve our digital capabilities in the years ahead.

Before we get into a deeper operational review, I want to reiterate what was announced in conjunction with today's earnings.

After completing our $100 million stock repurchase program during the second quarter our Board of Directors recently authorized a new $200 million repurchase program.

We are very pleased with this decision, as we believe that buying back stock at current price levels will provide a significant return on investment.

So turning to the brands.

The UGG brand second-quarter was filled with many positives.

In addition to the direct-to-consumer performance I noted earlier, domestic wholesale sales increased double-digits, highlighted by strong sell-through of fashion sandals and flip-flops.

The spring line had a good season, which we believe bodes well for sale-in of the 2013 line, as confidence in our expanding non-boot collections continues to grow with retailers.

During the quarter we shipped initial fall deliveries to several domestic accounts, including Nordstrom, ahead of their anniversary sale.

While it is obviously very early, well ahead of our main selling season, we believe that the sell-through data over the past few weeks has been positive.

With regard to Nordstrom, the women's fashion styles included in this year's sale are performing well, underscoring our belief that the brand is continuing to expand successfully beyond its traditional roots and is attracting new consumers.

Getting back to the direct-to-consumer business, our US stores posted a mid-single-digit comp increase as in-season demand for spring and summer styles remained healthy through the end of the quarter.

Regarding new stores, we opened our first ever men's only shop next to our Madison Avenue store in New York City in early June.

The early results have exceeded our expectation, which we believe reflects the growing momentum of the men's line coming off a strong year in 2011.

We witnessed similarly strong demand for open-toe products on our domestic e-commerce site.

The women's Ansley, [Tawny] and Luciana did particularly well.

The men's slipper, casual and sandal categories, along with the women's slipper and fashion sandals, all delivered double-digit increases.

Our international sales were down in the second quarter as weakness in Europe outweighed the strength in Asia.

In Europe second-quarter sales for our UGG brand declined in-line with our projections, as our largest distributors reduced their fall orders this year due to the inventory overhang created by the combination of a warm winter, worsening economies and deteriorating consumer confidence.

Our European wholesale business was down, although I can note that second-quarter sell-through in the UK was positive across virtually all product classes.

We have implemented many organizational and distribution changes over the past six months in order to get this business on track.

These include price adjustments on key styles to increase accessibility, tightened distribution to better reflect the UGG brand's positioning, and increased investments in local marketing and visual merchandising to ensure our product is front and center at point of purchase during key consumer buying periods.

After a challenging 12 months for our European retail division, we believe that the situation has stabilized somewhat, evidenced by high-single-digit same-store sales gain for the second quarter.

Expanding our retail footprint in the UK, as well as France and the Benelux is a key aspect to our strategy to evolve the UGG brand's lifestyle position.

During the quarter, and ahead of the Olympics, we opened one store in the UK in a terrific location in Piccadilly, in addition to one store in Benelux.

We are on schedule to open four more stores in the UK in the second-half of this year, plus two stores in France.

While the second quarter is always a low-volume quarter for our retail, and the majority of our retail sales are concentrated in the fourth quarter, we are encouraged by these results.

Lastly, Asia exhibited nice growth.

Distributor sales for the UGG brand in Asia increased 70% versus a year ago.

And our Japanese business, which is wholesale, retail and e-commerce, collectively was up more than 80% over the second quarter last year, bouncing back nicely from the earthquake impact, driven by a strong double-digit comp increase, additional retail locations and a larger assortment of spring product at key wholesale accounts.

As of June 30 we had 12 retail stores in Japan, three of which are now in the comp base.

As we previously announced, we purchased the remaining minority interest in our China joint venture in April.

We are bullish about the UGG brand's opportunities in this incredibly large market, and continue to execute a strategy aimed at building a long-term, sustainable business in this region.

We ended the second quarter with 13 stores in China, up from five a year ago.

Our recent expansion has been focused on backfilling existing metro areas in order to best leverage our current infrastructure.

As a result our stores in China are some of the most profitable in our international fleet, even with double-digit declines in our three comp stores from some expected cannibalization.

We have learned a good deal this year about the style and fit preferences in the Chinese market.

For example, foot shape and heel height have had -- all made adjustments to the assortment for 2013.

We are also adding more resources to improve execution in future results, including more real estate support and increased investments in local marketing and advertising.

And based on this experience -- based on his experience, we believe that Dave Powers will be integral to this part of our business as it evolves and expands over the next several years.

Turning to the Teva brand.

Net sales for the second quarter decreased 15.4% to $34.1 million compared to $40.3 million for the same period last year.

The Teva brand's second-quarter performance in the US was very similar to the first quarter -- strong sell-in and good sell-through driven by a demand for our iconic sport sandal line, and a growing assortment of light hiking and multi-sport footwear.

However, record domestic wholesale sales and growth in domestic e-commerce sales were offset by a decline in international sales.

Europe continues to be challenging.

Following last summer's wet weather, which led retailers to order cautiously, we believe that the slowdown of the Eurozone economies this year has tightened consumer spending even further, leading retailers to be similarly cautious.

Domestically, despite good spring sell-through and award-winning fall product, reorder expectations for the second-half of the year had been reduced, as many key customers continue to struggle with carryover inventory of other fall/winter brands following the mild weather.

With the added economic uncertainty, the trend of conservative purchasing is expected to continue in the near-term.

However, we continue to be confident that the brand has the authenticity, positioning and product to expand its share of the domestic and European outdoor market, and we expect growth to resume once things stabilize.

The Sanuk brand delivered another outstanding performance.

Strong sell-in during the first quarter was followed by strong sell-through leading to a high level of reorders in the second quarter.

The Sanuk brand's success continues to be broad-based with both open- and closed-toe footwear sales up strong double digits.

From a channel perspective the brand remains one of the leaders in independent action sports stores, while continuing to gain traction with more mainstream specialty and department stores as well as key online retailers.

The Sanuk brand's e-commerce business delivered equally impressive results, driven by a great product offering and by the integration of Sanuk.com with Deckers' e-commerce platform.

With the brand now on the platform we can begin driving a higher level of consumer engagement and incorporate the Sanuk brand into our overall e-commerce strategy.

Overseas the brand's momentum is building in Asia as distributors continue to rollout Sanuk brand stores.

In aggregate the performance of these stores has been very promising, which we believe illustrates the Sanuk brand's growth prospects in the region, as well as the opportunity to develop Company-operated stores in the US and other direct markets.

With that I will turn the call over to Tom.

Tom.

Thanks, Angel.

Today's earnings release contains a good amount of detail about our second-quarter sales and earnings, including sales by brand, channel and geography, therefore, I am not -- I'm going to limit my discussion primarily to gross margins, operating expenses, the balance sheet and guidance.

Gross margin for the second quarter was 42.2% compared to 42.7% in second quarter of last year.

The 50 basis point decline is primarily attributable to an increase in product costs, the negative mix impact of a decline in Europe wholesale sales, and foreign exchange, partially offset by the contribution of Sanuk brand and increased pricing compared with a year ago.

Gross margin for the second quarter of 2012 was 80 basis points below our expectations, primarily due to lower wholesale margins in Europe.

Total SG&A expense for the quarter was $102.3 million or 58.6% of net sales compared to $76.7 million or 49.7% of net sales a year ago.

SG&A increased primarily due to an additional $14.8 million of operating expenses from owning the Sanuk brand, which includes $7.2 million related to the estimated earnout liability and the amortization of intangible assets.

$8.2 million of the increase in SG&A relates to additional retail expenses, most of which is for the 21 new retail stores that were not open during the second quarter last year.

We are investing in personnel and infrastructure to support a more aggressive store rollout, as we plan to build towards a base of approximately 200 stores by the end of 2015.

In addition, excluding Sanuk, we had an increase of $3.9 million in marketing, primarily related to the UGG brand's new and classic campaigns.

Operating expenses were below expectations primarily due to reduced retail, legal and several other general and administrative expenses.

The operating loss for the second quarter was [$28.7 million] compared to $10.8 million last year, primarily the result of aforementioned increases in expenses.

We recorded income tax benefit of $8.4 million in the second quarter compared to $3.2 million in the second quarter last year.

Second-quarter diluted loss per share was $0.52 compared to our guidance for the loss of $0.60.

The upside was driven by a higher forecasted domestic sales and lower operating expenses, offset by $0.07 of additional expense related to an increase in the estimated earnout liability for the Sanuk brand due to increased confidence in the long-term earnings outlook for the brand.

Now turning to the balance sheet.

At June 30, 2012, the inventory increased 64.8% to $346.3 million from $210 million at June 30, 2011.

By brand compared to June 30, 2011, UGG brand inventory increased $130.1 million to $308.9 million.

Teva brand inventory decreased $1.1 million to $21.1 million.

And our other brands inventory decreased $2 million to $7 million.

Inventories for the Sanuk brand, which was acquired on July 1, 2011, was $9.3 million at June 30, 2012.

The $130.1 million increase in UGG inventory was primarily attributable to the growth of fall 2012 inventory, including the growth of our consumer direct division, carryover product from the 2011 holiday period, which we plan to utilize to fulfill orders during 2012, and an increase in product costs.

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

At June 30, 2012, current fall inventory represented approximately 85% of the total UGG brand inventory, and the remaining 15% inventory is spring inventory or inventory currently utilized or available for our retail outlets.

Although the absolute increase in fall inventory is approximately $105 million, approximately $80 million of that increase is in classics and slippers, for which we have orders.

And the remaining $25 million is for fall 2012 delivery for which the majority of we have orders as well.

In addition, increased product costs of approximately $40 million and approximately $10 million related to 21 additional retail stores, are also driving the increase in fall and spring inventory.

We still anticipate percentage year-over-year inventory growth to decline through the back-half of the year as we sell the carryover inventory.

During the quarter we repurchased 1.5 million shares of the stock for a total of $80 million.

As Angel mentioned earlier, we have completed the $100 million stock repurchase program authorized by our Board of Directors this past February.

And our Board has authorized a new $200 million stock repurchase program to begin in the third quarter of 2012.

The new authorization will be funded by existing and future cash balances, in addition to borrowings from our current credit facility, which we are in the process of expanding.

Now moving on to our outlook.

Taking into account our better-than-expected second-quarter results and the positive impact from share repurchases made during the second quarter, combined with the continued uncertainty in Europe, including a higher dollar versus the European currencies, a higher-than-previously projected tax rate, and increased Sanuk earnout expenses, we are maintaining our current full-year outlook.

We still expect 2012 revenues to increase approximately 14% over 2011 levels and diluted earnings per share to decrease between 9% and 10%.

Keep in mind that completed share repurchase does not reduce the total year's share count to the same level as Q3 or Q4 share count.

For the full year we still expect UGG brand sales to increase by approximately 10%.

We now expect Teva brand sales to be flat to slightly down compared to our prior guidance of growth in the low- to mid-single-digit range.

Plus Sanuk brand sales are now projected to be approximately $95 million, up from our prior guidance of approximately $90 million.

Combined sales of our other brands, which represent only $21 million of forecasted annual sales, are still expected to be down approximately 15%.

Our forecast is still based on a full-year gross margin decline of approximately 250 basis points and SG&A as a percentage of sales of approximately 30%.

Based on a higher mix of domestic pretax income our tax rate is now forecasted to be approximately 32%, up from our previous projection of approximately 31%.

Our full-year SG&A projection now includes approximately $17 million or $0.30 per diluted share associated with the amortization and accretion expenses related to the Sanuk brand acquisition, up from our previous guidance of $13 million or $0.23 per diluted share.

For the year we still expect capital expenditures to be approximately $80 million, with roughly $30 million allocated to the construction of our new headquarters; $30 million for new store openings, as well as store and showroom remodels; $10 million going to IT and maintenance projects; $4 million to upgrade our retail operating system; and the remaining $6 million for additional corporate infrastructure.

For the third quarter of 2012 we expect revenues to increase approximately 1% and diluted earnings per share to decrease approximately 31% from the third-quarter 2011 levels.

This guidance assumes a gross margin of approximately 43% and SG&A as a percentage of sales of approximately 28%.

Included in our SG&A projection is roughly $3.3 million or $0.06 per diluted share in expenses related to amortization and accretion expenses related to the Sanuk brand acquisition.

The tax rate for Q3 is estimated to be 31%.

For the fourth quarter 2012 we expect revenues to increase approximately 19% and diluted earnings per share to increase approximately 22% over fourth-quarter 2011 levels.

This guidance assumes a gross margin of approximately 50% and SG&A as a percentage of sales of approximately 21%.

Included in our SG&A projection is roughly $3.3 million or $0.06 per diluted share in expenses related to the amortization and accretion expenses related to the Sanuk brand acquisition.

The tax rate for Q4 is estimated to be 32%.

I will now turn the call back over to Angel.

Thanks, Tom.

As we prepare for our busiest selling period, and look out beyond 2012, we felt good about our prospects and are encouraged by some external trends that could benefit our results going forward.

Most importantly, we continue to operate a portfolio of brands, each of which we believe has multiple growth opportunities in both the US and international markets.

Based on several factors, including spring performance, conversations with key retail partners, and market research, we believe the UGG brand has never been stronger.

Specifically recent data tells us that consumer loyalty has increased over the past two plus years and that the percentage of people who have purchased UGG brand products are now wearing it more frequently.

Similarly, there has been a meaningful step-up in intend to purchase during the same period, while the brand recently received high marks for salience versus the competition.

Taken altogether, this gives us added confidence as we approach the brand's key selling season.

We believe that the Sanuk brand hasn't even begun to scratch the surface of its full potential, and moves into fall with a lot of momentum and good placement for its first true line of colder weather product.

The Teva brand exhibited good domestic sell-through this spring and summer, and continues to make solid progress, building share in the broader outdoor category through innovative closed-toe product introductions.

Another positive trend is the decline in sheepskin prices.

While we have yet to finalize negotiations with our key suppliers for our 2013 raw material needs, it appears prices have continued to come down from the historic highs at which we locked in during the back half of last year.

I would remind everyone that we purchased sheepskin from tanneries in China, not directly from farmers in Australia, and there are added costs in our price versus what has been quoted in recent news articles.

Furthermore, the prices for the different grades of sheepskin do not move in direct correlation with one another.

The key takeaway is that based on current visibility we are expecting our price for premium twin-faced sheepskin to decline in 2013 versus 2012.

That said, we do not anticipate prices to revert to 2011 levels.

We will be able to share more on our cost basis and provide more detailed color on the impact to next year's gross margins on the Q3 call in October.

To close, the entire organization is focused on executing strategies that we believe will allow us to carry on our strong track record of profitable growth.

Thank you for your continued interest in Deckers Outdoor.

Operator, we are ready now to take questions.

(Operator Instructions).

Bob Drbul, Barclays.

This is Jessica Schoen for Bob.

I was wondering if you could give us a little bit more information on the performance in the international Wholesale business?

And what was the cause of the difference in what you saw in your direct-to-consumer in Europe, specifically where it seemed to be quite a bit stronger?

This is Tom.

On the international Wholesale business we had -- we mentioned that we have good business in Asia, our Japanese Wholesale business there.

And on the Europe side that was -- we saw pressures even on the last call.

We talked about the European Wholesale business and those pressures continue in Europe.

We are seeing some better signs in the UK in the European wholesale business vis-a-vis let's say the Benelux in that business.

And back on the retail side, we are just really pleased with how we have been able to improve our performance in the UK retail stores during the quarter.

Okay, and then on -- as far as the different geographic regions in the US, I was wondering if in the less weather sensitive months of the year, like the quarter you just reported, if there is any kind of difference in the discrepancy between warm and colder regions for prospective performances?

Well, no, not really.

We saw a pretty strong performance across the board on our spring line.

Sandals did well, as I mentioned earlier.

A variety of products that just a few years ago wouldn't have been thought of as UGG product performed quite well, and we saw that in every corner of the country.

All right, great, thanks very much.

Mitch Kummetz, Robert Baird.

Let me start -- on the fourth-quarter guidance I was hoping you could just help us get to the 19% growth that you guys are forecasting.

And what I mean by that is I know you guys are opening a lot of stores.

Could you maybe speak to the comp that you are expecting within your retail business?

You talked a little bit about how you expect the wholesale piece to come together maybe relative to your backlog.

And then talk about your e-commerce expectation as well.

This is Tom.

We are -- on the fourth-quarter on the retail perspective we are opening a good amount of stores in the fourth quarter, and we are also encouraged by the recent performance in the comp performance.

So we are looking for -- really consistent with prior quarters sort of a mid-single-digit comp assumption going into the back, but ended up the year on more of a mid-single-digit comp assumption, I should say.

So there is a strong comp assumption in the fourth quarter.

The domestic Wholesale business between that and men's line, the additional marketing, we have got Sanuk.

We expect some good growth in Sanuk in the fourth quarter as well.

And our e-commerce business, more international growth as well as domestic growth.

So all those factors make us feel comfortable with that four-quarter sales growth number.

Let me ask the question maybe another way.

I know last year in Q4 you had some cancellations.

I think there were some closeouts that hurt gross margin.

The at-once business was a bit soft.

What are you thinking in terms of those areas this year versus last year?

Does the guidance at this point assume fairly dramatic improvement in those areas or is there still room for upside, assuming we have more normal weather and you can get that kind of improvement?

It is more of a moderate to sort of average improvement in the way we look at reorder possibilities and the wholesale business.

And with our inventory levels we do have the opportunity to chase more business here in the fourth-quarter if there is -- you know, the weather does really, really react in our favor.

Let me ask one last thing.

I think as your guidance as of the last quarter, I think you were saying by region you expected international to be up mid-teens.

I think maybe US up mid-teens as well.

It looks like international is tracking plus -- I think I have got it at 7% through the first-half.

Are you changing your outlook for the year in terms of those regions or is it still what it was as of the last call?

We are looking at on the international side pretty consistent with -- for the total year on the international side growth pretty consistent with what we have now incurred for the first-half of the year.

Okay, that is helpful.

Great, thanks and good luck.

Omar Saad, ISI Group.

I wanted to follow up on the guidance 3Q versus 4Q, but on the gross margin side it looks like, I think you mentioned 600 BPs and 3Q pressure and only 100 in the fourth quarter.

Can you tell me what is in -- and I think one implies, I don't know, 43% margin versus a 50% margin.

Can you help us understand the underlying dynamics there?

Is it a mix shift issue?

It is a channel shift issue, wholesale versus retail or different types of products, or is there some reason that the inflation that you have seen in the sourcing side of it hitting more in the third quarter than the fourth quarter?

Just help us understand the setup on the gross margin differential would be really helpful.

This is Tom.

Yes, the third quarter has -- doesn't have the same retail store or e-commerce contribution that the fourth-quarter had, so therefore, it is more vulnerable so to speak to the increased sheepskin costs that we have experienced this year.

So that is why there is such a drag on the third quarter gross margins.

And I think another thing is we are being more cautious with our international business this year, especially Europe, from a margin perspective vis-a-vis the prior year.

So that is another reason that puts some pressure on the third-quarter gross margin versus the fourth quarter.

And that is a bigger third-quarter business, the international because it is wholesale?

Yes, it is a good-sized business in the third quarter.

But the biggest driver is -- Omar, just to verify, the biggest driver is the fact there is just not as much retail business in the third quarter versus the fourth quarter, so you really get -- bear a lot of the brunt of that increased sheepskin costs.

Got you, got you.

And then, Angel, I want to ask you a question about the US business versus the European business or the international business.

Maybe international in total, given some of the comps -- negative comps on China -- I know there has been a drag in the UK, down 14% or 15% in the quarter.

The US business still looking pretty healthy.

The comps are good, the wholesale is up.

Is there something different in terms of how the brand is being interpreted by consumers or how it is being accepted, or the perception, or is it that it was more of a distributorship business and you really haven't had a chance to put your brand stamp on it so there is a disconnect there?

But just help us understand what seemed to be pretty two different trends, US versus international, for the UGG brand.

Well, fundamentally, we often forget that the brand has had many years of evolution in the US.

We have evolved the fashion program here in the US separate and distinct from -- and rounding out our classic business, our core classic business.

It has only been a very short period time, I would say two years, since we really began an aggressive effort to evolve the non-classic product assortment in the UK.

And when you have a distributor-driven model like we had, the distributor is going to focus on the smallest number of SKUs to drive the highest revenue.

And so they were primarily a core classic business.

And really only until we opened our stores did we start exposing consumers to more of what the UGG brand represents.

Also, the UK comps were up in Q2, by the way, which is important to note.

So the fact that the consumer in the UK is seeing a more -- a broader assortment of products bodes really well.

Slippers are doing well there, and that is something that we had been trying to get established in the UK for quite a long time.

And it was very difficult to do through a third party.

So that is important to understand there is a difference in the timing and the rollout of non-core classic product and that is just trying to hit in the last season or two.

And with reference to Asia, again, in those markets since they are -- in China, for example, we have been primarily driven by our retail operation.

There is no wholesale business.

The consumers have seen a broad assortment from day one, and that is performing well.

In Japan we had the same issue until we took over where the distributor was primarily focusing on core classic.

And, again, in the last two seasons we have been driving diversification of the assortment and the mix in Japan.

So the brand in the US has got about a five or six year head start on the rest of the world.

And footwear being the type of business it is, it is awfully hard in a wholesale environment to go in with such a broad assortment of product in the first years, because retailers do have to have a foundation of Sell-through and confidence to continue to expand the product line, and we're earning that every single day as we continue to evolve outside the US.

Thanks, and if I could just ask one more follow-up.

How do you think about innovation in that core UGG product and the silhouette?

Do you have any things up your sleeve for this fall and holiday and into next year in terms of some innovation around the core product, whether it is different silhouettes that still use the sheepskin?

How do you think about that process?

Well, that is a crucial part of any brand's long-term success.

And we have been extremely focused on that.

You will begin to see -- beginning in this holiday period, for example, in limited distribution, but nevertheless very important new products from UGG.

More of what we call -- really sort of re-evolving -- evolving the Ultra part of our line, which is actually more weather oriented, but I wouldn't say cold-weather product.

So that is coming.

You're going to see next year a lot of innovation in our core classic.

And we have been listening to what consumers have been saying.

We want to have product that is more durable.

We want to have product that is even more luxurious.

We want to have product that gives better support.

We want to have product that grips better.

So all of those things are coming as we continue to evolve the classic line.

So, yes, really important.

Thank you.

Jim Duffy, Stifel Nicolaus.

A couple of questions.

One, with respect to the outlook I'm hoping you can shed some more light on your expectations embedded within the guidance for the US wholesale business.

And I am also wondering if that outlook for the wholesale business contains any planned clearance sales or is the fall 2011 clearance effort past you at this point?

This is Tom.

We expect some good growth in the US wholesale business, more of that in the fourth quarter versus the third quarter.

As part of any footwear brand there is always an element of closeouts in the mix.

The fourth quarter is not really a large closeout quarter.

That is more of a first-quarter phenomenon.

So I hope that answers your question on that.

Sure.

I guess I'm wondering if you still have fall 2011 inventory that you don't view to be in-line or have orders for that you're looking to close out in the back half of the year?

There is always a certain element of that, but not a significant amount really because on the -- our product, whether it is -- I commented about the classics and the orders that we have on that.

Historically there has been very minimal amount of closeouts for classics.

And then the nonclassic product, we don't take large bets on that.

So there is a minimum amount of that that is left over at any point in time, and that does get closed out, similar to that it did in the first quarter of this year.

It is sort of standard operating procedure for a footwear company, a minimal amount in the fourth quarter.

I got you.

Thanks, Tom.

And then, Angel, some encouraging comments on sell-through being positive in the UK.

Based on what you see in the UK at this point do you believe the wholesale business is finding a base in 2012 upon which you can build in 2013, or do you think it could take more time to get the brand positioning where you want it to make forward progress?

Well, we feel we have made excellent progress in terms of the assortment at the wholesale level, diversifying away from the strictly classical orientation.

Our retail stores, as I said earlier, are really helping us do that.

Now we just really are, as everyone else, dependent on the macroeconomic conditions, and really consumer confidence bouncing back in the UK.

Perhaps after the Olympics and all of the energy that comes after that we'll begin to see some of that.

But in terms of our line and the assortment and distribution, those things have been cleaned up.

I'm feeling pretty good about all that stuff.

Okay, good to hear.

Thank you.

Howard Tubin, RBC Capital Markets.

Tom, can you give us any more detail on inventory growth?

I know you said it is going to moderate as we move throughout the year.

Should we think about it up slightly at the end of the year?

Are we still talking about up like maybe 30%, 40%, any more color there?

It won't be up slightly, because we are growing our business.

So on the fourth quarter we're going to have -- make sure we got the spring inventory in on-time to be able to move it -- to have it available for the first quarter.

So it won't be slightly, it will be -- obviously, it won't be up to the same levels as it is -- as it has been.

I would say it is mostly in the fourth quarter -- more of a 30% kind of increase relative to the fourth quarter last year.

Got it.

Got it, great.

And then in terms of just -- if it actually snows this winter how do you feel about your ability to maybe chase into some reorders if they come in?

Will you have enough product to fulfill reorders should they materialize this year?

Yes, we will still top that.

We feel that we have got the right amount of inventory available to chase some -- obviously, to chase some business this year.

Got it.

All right, thanks.

Camilo Lyon, Canaccord Genuity.

I am hoping you could shed some light on the third-quarter sales guidance, and maybe parse out a little bit of what is going on there with domestic wholesale versus international wholesale -- what was the source there of the 1% growth?

On the third quarter the international business -- you know, Europe -- we have talked about all the uncertainties we have been having in Europe and the pressure that we are seeing there, and relative to the prior year the European business is going to be down.

We feel good where the Asian business is headed.

The Asian business is going to be up some.

And then the domestic business is going to be slightly up as well in the third quarter.

Then we have got some more retail stores coming in towards the middle to late end of the third quarter.

Great.

And just on retail, do you have your new store productivity for the second quarter?

We certainly have that.

We don't really get into all the economics about all the individual stores.

We have been pleased about the productivity.

We commented about the China stores, and albeit they are smaller stores relative to the US, the returns on capital there have been very good.

You saw the improvement on the comp in the Japanese markets with those comp stores, those returns have been very good.

And, obviously, the US business the stores have done very well.

Okay, so then maybe just asked another way then.

For the Chinese comps that were down double-digits, if I remember correctly, if you could just maybe highlight what the first one, two, or three reasons were that continued to drive that decline in the comp base?

I think some of it is some of the product assortment, we commented on the call.

You know, we are learning for the Chinese market that we may need to have somewhat of a different product assortment.

I think another thing is some cannibalization.

As we open more new stores on a staggered basis, as opposed to opening all the stores in one metropolitan market at the same time, you by definition get some cannibalization, especially as you have more learning, as you open each store.

So those are some of the reasons why the there was -- and I think another thing that we talked about this, we are going to improve and increase the marketing so that market can improve the awareness of the UGG brand and educate the Chinese consumer about what a real UGG is versus some of the downmarket competitors and knockoffs there.

So those are some of the headwinds we face in China that we are working to improve for the rest of the year.

Got it.

And if I could just squeeze in one last one.

Any plans to go outside or to pursue different retail locations in the US versus relative to the urban areas that you have been targeting right now?

No, we really don't plan to expand far beyond our current strategy.

Realistically we think there is probably 50 locations in the US appropriate for an UGG store, and really don't see a reason to go beyond that in the long-term.

Okay, best of luck in the back-half.

Scott Krasik, BB&T Capital Markets.

Angel, the issue around pricing I think has concerned investors, and retailers have expressed some issue.

Do you feel any more confident or do you have any evidence versus three months ago that consumers will accept classic talls at $210 or tall Bailey Buttons at $230, $235?

Have you seen any of that up to this point?

Well, it is still too early to comment definitively on that.

Obviously, we -- I am as concerned about the pricing as anyone.

I have always felt that this is an accessible brand.

And we have to really understand where those thresholds of accessibility are.

We really do feel that $200 is a threshold price point.

We have tried very, very hard not to go above that.

And we are working hard to make sure that we come back to that where sheepskin pricing allows us to do so.

One thing to understand though in terms of the total mix, those tall products are not a significant percentage of what we sell.

Those are a small percentage of our total mix.

The bulk of it is classic short in terms of classic assortment, Bailey Button Mini and those kinds of products, which use less sheepskin and obviously are at lower price points.

So I guess to answer your question, long-term I see us operating within those thresholds that we have established that we know consumers will be wanting to see from the brand in order for the brand to remain as accessible as possible worldwide.

That is a good answer.

Thanks.

And then just a question on China.

There has been some speculation and reports are in that you bungled your store locations and you put the stores in the wrong malls or the long parts of the mall.

Is it a situation where you need to start over?

Do you feel good about the locations you have, and as more stores enter the comp base we will start to see that turn positive?

I think our locations are the envy of most people in our footwear business in Asia.

I don't understand the comment that we bungled the store locations.

I think if anything else -- if nothing else what we have learned is that we may have gone a little bit too far down the luxury part of the mall.

So that pulling back just a little bit from that yields much higher traffic and much more revenue opportunity, much more exposure to more consumers.

So I would always rather come from a place where we started out as a little bit too high-end and then had to back off just slightly from that in order to reach more people.

So the strategy going forward will be exactly that.

We will be diversifying our store mix, and in the secondary cities and in secondary locations within cities, to create a mix of what I would call premium high-end versus exclusively luxury.

And our initial thrust was pretty much luxury.

And the consumer in China is interested as much in the accessible luxury as luxury in your view?

Well, I think, as the consumer evolves in any market, and especially a market like China, after a while they begin to understand that it isn't just about wearing a label.

They want true price value for their purchase.

And they start to understand, well, why should I pay so much more when I can get a product at a more reasonable price that is just as good.

And so that is a sophistication of the consumer.

You're starting to see that.

Whereas a few years ago into the last year you really saw an extreme label consciousness.

They had to have the label at all costs.

Right.

I think you're starting to see a mitigation of that.

It is starting to come down to, yes, they still want premium labels, but they are also becoming much more savvy consumers, and that is a natural evolution of the consumer.

Good, all right, good luck.

Thanks.

Diana Katz, Lazard Capital Markets.

Given the new authorization, what share count should we be modeling for the year?

And how should we think about the cash balance and operating cash flow by year-end?

With the new authorization we really can't comment on what the Company's intentions are relative to when they're going to repurchase, and what volumes and obviously at what price.

So can't comment on that.

I did comment on the call to be sensitive to the fourth quarter share count versus the third quarter and the fourth quarter, because they have more of a impact because of the share repurchase we did complete.

On an operating cash flow basis we feel good where we are at.

I commented on the inventory growth.

I think we might end the year at close to 30% roughly growth compared to the prior year.

Our receivable balances should be up some, consistent with the growth in our wholesale business.

So we should be able to generate good free cash flow then to have that available for what repurchasing we do and when and what quarters we do that.

I think another point to make is we have good support from our banking group, and we are looking at expanding a revolving line of credit up to as much as doubling the size of our line of credit to have more flexibility going forward.

Okay.

And then for 4Q can you parse out what percent should that business you already have orders for?

I think the comment that we have for the domestic wholesale business, consistent with prior years, we have got a good amount of that business -- already we have orders for that.

Keep in mind the fourth quarter, with even more retail stores than a year ago, there is going to be a lot of at-once business.

Our European business now with the concerns we have on how -- the macro backdrop there, most of that business now is pre-ordered as well.

So I hope that answers your question.

Okay, thanks so much.

Best of luck.

Christian Buss, Credit Suisse.

I was wondering if you could provide a little bit of color about how you're thinking longer-term about the balance between growth with your historical wholesale partners and growth from the direct-to-consumer channel?

Sure.

Long-term we are a wholesale-driven enterprise.

It is important today to have a complete presentation of the brands to consumers -- e-commerce, your own retail stores, wholesale, and within wholesale shop-in-shops.

That said, footwear is unique.

Footwear is one of those kind of enterprises that it benefits you to be available to consumers with a broad assortment of competition.

A consumer comes into the store, and generally speaking if they go to Nordstrom, and they're looking to buy a certain type of product, let's say they want a hiking boot, they want to try on multiple brands of hiking boots.

They want to know which is the best fit for them.

Once they have made up their mind about what brand works for them and they love the brand, they then tend to come back to that brand at that brand's own stores and websites.

But that initial recruitment of new consumers happens in a wholesale environment.

It doesn't really happen in your own stores initially in footwear.

So we know that reality, and we intend to be predominantly wholesale in the future in the US.

In Japan we will be the same kind of thing.

It will be mix.

It will be wholesale.

In China it going to be retail and e-commerce, because there is no -- as we have mentioned many times, there is real no wholesale environment.

And do you have a target mix wholesale for retail over the long-term?

I would probably say 70/30 would be my guess.

Okay, that is very helpful.

Thank you very much, and best of luck.

Chris Svezia, Susquehanna Financial Group.

A couple questions.

I guess, first, Angel, you commented -- I know it is still kind of early, but just on the Nordstrom anniversary sale, if you have any just color in terms of any pointers, things that just stand out a little bit in terms of where maybe consumers are gravitating to?

New products, styles, classic, et cetera, anything that just stands out a little bit in terms of what you're seeing would be helpful.

Okay, I'm always hesitant to be real specific because I don't think it is our right to do that.

It is Nordstrom's business, and they can comment on that.

But I will say a couple of things.

First of all, the performance of our nonclassic fashion product has been really good.

We are very happy with that.

We think that the event this year, especially with the heat that you are seeing around the country, it is a little early to judge the performance for core classic.

It has probably suffered from these 100 degree days we are seeing around the country, and there is no question about that.

So it is early in the season for the core classic, but the bulk of the stuff that you will see in the Nordstrom anniversary event is the fashion and the new products.

So it is really not driven -- the mix is a lot more the new stuff than it is core classic.

So we are quite happy, quite satisfied with the results so far.

Okay, that is good to hear.

When you go into the store you see people looking more for the fashion product and classic.

And just what we are hearing is with 100 degree temperatures fur-lined boots aren't exactly on people's mind at the moment.

But the fashion piece seems to definitely have interest.

So that's good to hear.

And just lastly, just on a -- I'm curious on an improvement in same-store sales, particularly in the UK.

Do you guys -- I mean, can you just call out anything that you have done differently, whether pricing, whether traffic?

It might be a little early from the Olympics in that regard.

But just call out something that you have done or doing differently, products, et cetera, that is causing a wide differentiation or separation between what is going on at wholesale and what is going on in your Company-owned retail stores?

This is Tom.

Some of it is product, you know, the broader product assortment.

Some of it is -- we have got a fairly easy comp relative to the prior year, and we have been executing better.

We have got some improved management of the UK retail operations vis-a-vis year ago.

We have got some more marketing around the stores than we did a year ago.

Another year in the market on a direct basis as well with us running the show helps improve and have some positive spill-off to our own stores as well.

We have talked in the UK about through rationalizing some of the wholesale distribution, that is benefiting some of our own stores as a result of that.

So a lot of positive things and initiatives have been help drive that improved comp.

Okay.

And just lastly, if I can sneak one in here.

Just on the men's business, any color you can add on the men's business at this point, or is it just too early?

Well, again, the sneakers have been doing well.

And that is -- we also have some casual shoes that have done quite well in our own stores.

It is still a little early because we haven't shipped the bulk of that product for the wholesale environment yet.

So it bodes well.

We are certainly up in our own stores, if that is -- and on our website, so that is very important.

Okay, that is good.

Okay, well, thanks and all the best.

That does conclude today's question-and-answer session.

We will turn it back over to the speakers for closing remarks.

Well, thank you all for attending the conference.

We are looking forward to the rest of the year.

Clearly we have challenges in Europe that we are focused on overcoming with better performance, better execution and a much strengthened management team across the world.

So we look forward to the next call in October.

Thank you all.

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

We appreciate your participation.