Deckers Outdoor Corp (DECK) 2012 Q3 法說會逐字稿

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

Welcome to the Deckers Outdoor Corp.

third-quarter 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 and 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 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 structures 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 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 the Form 10-K and its other documents filed by the SEC.

Listeners are cautioned not to place undue reliance on the 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 revision to forward-looking statements.

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

Clearly, the third quarter was more challenging for the UGG brand than we anticipated from a topline perspective.

Before getting into the specifics of our third-quarter numbers, I first want to touch on some of the short-term challenges that we face this year and our tactics to address these challenges as well as a broader discussion about the UGG brand.

As you know, after increasing 30% in 2011 over 2010, our sheepskin costs were up another 40% in 2012.

As you also know, we have implemented programs to help mitigate the impact of higher sheepskin and raw materials costs, including selectively raising prices.

Based on sellthrough patterns in our own retail stores, reports from our major wholesale accounts, and industry data, we began to believe as the quarter progressed that our price increases over the past two years had pushed us about the consumer's price value expectations for the UGG brand, a concern that we voiced on past earnings calls.

The pushback to the higher price points was compounded by warm weather.

2012 is the warmest year on record in the United States since record-keeping began in the 1800s.

We believe that this fact, combined with recessionary conditions in Europe and general economic uncertainty and the growing trend of buy now, wear now has pushed back the start of the brand's key selling season at retail this year.

The good news is we were in a position to react quickly to the price resistance as a result of the decreases in our product cost for Fall '13 that were finalized in mid-September.

As these negotiations were unfolding and we gained more visibility into the adverse effects of our price increases, we made the decision to adjust our domestic pricing in mid-September on select classic styles, retroactive to all orders shipped since July 1. Included in the adjustment were the Classic short, Classic tall, and Bailey Button, three styles with suggested retail price points we had raised by nearly 20% since 2010 in response to the 80% increase in our sheepskin and raw material costs over the same period.

While the adjustment impacted our third-quarter results and contributed to our revised outlook for Q4, I want to be clear that the adjustment is from this year's initial pricing and ultimately serves as a partial offset to our price increases, not a net decrease year over year.

The price adjustment has been mischaracterized in recent industry coverage as quote discounting unquote, but in fact it is an important strategic decision that we believe is in the best interest of the brand for the long term.

It was also the right thing to do for our consumers and our customers, given the continued economic uncertainty and unpredictable weather patterns.

And we believe it will benefit our retail partners by helping them to finish the year with good sellthrough and healthy margins.

That said, we continue to feel very good about our long-term outlook for this Company which is reflected in the fact that we have repurchased $185 million of our common stock over the past year.

Now let me spend a little time talking more broadly about the UGG brand and what we are hearing from consumers and retailers before tackling the specifics of the third quarter.

We regularly field a global brand tracker study, surveying thousands of consumers on their preferences and specific plans to purchase.

Data from our most recent tracker, fielded in July of this year, shows us at 67% of women in America have a high opinion of the UGG brand which is up significantly from 51% in 2010.

32% of women in America report that they will definitely or probably buy the UGG brand in the next 12 months.

And that, too, is up significantly from 24% in 2010.

In China, a relatively new market for us, 40% of the women surveyed have a high opinion of the UGG brand which is surpassed by the 66% of women in France who shared that opinion.

We attribute you a large portion of this growing preference and intent to purchase to our recent product and marketing initiatives.

It is clear that we have gone beyond the need to grow awareness of the UGG brand in some markets and are invested in growing brand affinity, consumer traffic, and ultimately purchase.

We know that once consumers purchase the UGG brand they generally become loyal advocates.

But we simply need to do a better job of bringing them in and converting them.

Now I could go on with more data or statistics, but know that we are not seeing a downturn in global sentiment about the strength of the UGG brand to any of our key perception metrics.

In fact, the only negative trend regarding the UGG brand that we picked up in our most recent brand tracker was the fact that prices had gotten too high, which was taken into consideration in our recent action to bring prices on key items back in line with consumer expectations.

We are also seeing a major shift in how consumers are actually shopping right now in apparel and we believe we are starting to see it in footwear, mainly in our Classic line.

Consumers have shortened their purchase cycle in order to buy now and wear now.

The New York City Economic Development Corporation's report fashion -- New York City 2020 highlighted this on-demand purchasing behavior as one of its nine major business trends given the impact that it is having on major brands and retailers.

Namely, that the key holiday selling season at retail is starting much later in the year in the season for the season.

The footwear brands that are beginning to recognize this shift are moving to more flexible production cycles, more efficient inventory planning and more targeted and timely advertising and retail virtualizing practices.

We fully intend to get ahead of this shift in all areas of our business and look forward to sharing the fruits of these efforts in the upcoming calls.

Turning to innovation.

We believe that we have taken a significant step in mitigating one of the largest risk factors in the business, i.e., the volatility of the sheepskin market.

Just last week we met a key consumer preference hurdle on a process innovation that we plan to roll out next year.

We will share more with you as we get closer to the shipping window next year.

Our data is being further validated by our wholesale accounts.

Just last month we conducted an anonymous survey of our top independent accounts.

The results of that survey highlighted the importance of the UGG brand to these retailers and just how vested they are in creating mutual long-term success of the brand.

The fact that they consistently regard our reps as some of the best in the industry and, not unlike with consumers, pricing concerns were highlighted.

Specific to the third quarter, let me get into details now -- looking at the UGG brand, in the US, wholesale sellthrough was below the level that most of our accounts have become accustomed to with the brand.

However, it is important to keep in mind that these rates are down off our historic levels which are typically higher than many of our peers.

Specifically, Classic demand was softer than expected due to the combination of warm temperatures and higher price points while our women's fashion collection sold well but were below plan due to some late deliveries by our factories.

It is worth noting that NPD data does show an increase in the UGG brand's women's casuals which is a non-weather dependent category.

The category as a whole is up 26.7% year over year and the UGG brand is outpacing even that significant gain with a 40.8% increase.

Men's, too, was a bright spot during the quarter, led by the Hannen Casual, the Neumel, Caldwell and Leighton as with our slipper business where our comfort platform and consistent prices from a year ago continue to resonate positively with consumers.

Following the mid-September price adjustments, and with the recent arrival of colder weather in certain parts of the country, sellthrough has turned positive at many of our major retail partners, led by our Classic slipper and fashion collections.

In markets during weeks that have achieved normal temperatures the business has responded very well.

Given the later than normal start to the season, our sales team are working very closely with accounts to manage expectations and inventory levels which, to date, have resulted in only a small percentage of cancellations and the migration of some Q3 deliveries into Q4.

Our selling on specialty classics such as Dylyn and Bailey Bow has been very strong.

Slippers have been excellent.

Fashion, in particular, the Conor, Channing II, and Georgette have been excellent.

Casuals are also very strong including the Alouette and Laela Quilted.

Our fashion deliveries were later than planned which hurt our early Q3 selling, but once they hit the floor they have performed.

Men's and kids have been up over last year in our key accounts as well.

We witnessed similar sales patterns in our domestic retail locations where comp store sales declined high single-digits on top of a low 20% increase a year ago.

Comps were impacted by negative traffic trends which we attributed primarily to the price increases that we implemented to mitigate the increase in sheepskin costs, warmer weather, and uncertainty around the economy and the emergent on-demand consumer behavior.

These were however partially offset by improved average transactions and conversions.

October comps have shown some improvement over the third quarter, but we believe it is prudent to take a cautious stance on domestic retail until we get deeper into the holiday season and generate better performances on more consistent basis.

ECommerce sales both in the US and internationally were a standout in the third quarter.

The performance of our eCommerce business versus brick-and-mortar locations appears to be consistent with recent industry commentary on the performances of these two channels, giving us added conviction that the UGG brand's popularity has not waned and that many of the forces weighing on our recent performance are not brand-specific.

Just as telling are the styles that are selling well through our domestic and international websites.

We continue to see strong demand for the previously mentioned new collections of fashion and casual boots and non-boots.

We believe that the performance of our new products, particularly in the face of some external headwinds is a great barometer of the UGG brand's popularity.

In Europe we headed into the third quarter with a fall order book that was down year over year as a result of last season's mild winter and the poor economy in our two largest markets, the UK and Benelux.

In addition, the London Olympics unexpectedly caused an overall drag on sales as tourists for the most part avoided the city shopping areas and locals generally stayed home at the urging of the government to avoid traffic congestion and overcrowding on public transportation.

Consequently, our four comp store sales were down double digits on a percentage basis in Q3 as well as our large wholesale accounts.

As a result sales of the UGG brand spring and summer styles fell off after a strong July and sellthrough of fall product got off to a slower start than in previous years.

We believe that hot weather late in the quarter and on-demand consumption once again contributed to the slow start in the UK and continental Europe.

Now despite these headwinds we feel that our Fall '12 product offering is much stronger than last year and with more accessible opening price points.

We believe the brand will be more competitive this holiday.

In addition, our European distribution, sales representation, customer service, account relationships and marketing programs are all significantly improved as to what we had before.

We expect that these initiatives will be integral to creating a long-term sustainable business in this region.

In the short term however our results will hinge on colder temperatures as the UGG brand is still predominantly viewed as a cold weather and holiday brand.

We have seen sales pick up over the past few weeks but will need more prolonged periods of increased demand to work down in channel inventory, improve retailer confidence and generate more reorder business.

Turning to Asia, our expansion strategy continues to unfold with solid results.

In Japan, strong sell-in of the Fall collection combined with increased distribution (technical difficulty) sizable increase in our wholesale business over the same period last year.

Retail sales also increased significantly driven by six new locations, partially offset by a high single-digit comp decline.

Like the US and Europe, we believe that our stores in Asia or impacted by warm weather in the third quarter.

Sales picked up as the quarter progressed driven by increased consumer communication and media exposure, adjustments to in-store merchandising and a new sales incentive program for employees.

We had a busy third quarter in China with the opening of seven new stores in which we can showcase the breadth and depths of the UGG brand's offering.

We now have 20 stores, up from eight this time a year ago.

In terms of performance, new stores are performing above pro forma expectations while the four stores in the comp base continue to see some pressure from cannibalization and increased competition from counterfeit products.

All in all, we believe we are making good traction in setting the brand position and refining the look and fit of the product assortment to reflect regional preferences.

We expect sales trends in China to improve further as we continue to exploit this large and growing opportunity.

Now as we have done on recent calls, I would like to continue sharing additional details about our retail business as this channel becomes a larger portion of our overall results, and what we believe will be an important profit driver for us.

We ended the third quarter with 68 global locations, up from 53 at the end of the second quarter and compared to 39 a year ago.

Of these, 30 are now in the comp base, including 17 in the US, four in the UK, four in China and five in Japan.

Third quarter comp store sales declined 13% on top of an 11% increase in the comp period a year ago with US and Japan comps down single -- high single-digits and the UK and China comps down double-digits.

Our recent comp performance was driven by decline in traffic which we attribute to weather and uncertainty around the global economy partially offset by an increase in conversion and growth in men's casuals and the debut of the UGG Collection for Men.

Despite recent comp trends our store base remains highly productive and profitable.

As of September 30, for stores open at least 12 months annual sales per square-foot on a trailing 12-month basis were approximately $1,700.

A figure we are very proud of, especially given the warm weather during this period.

We also believe that our retail division is yet to fully benefit from the leadership of Dave Powers, President of Consumer Direct, and many of the systems and infrastructure investments we have made during the past year.

In terms of regional performance, the US and Asia are above the Company average while Europe is below.

We ended the third quarter for both comp stores and new stores with approximately 180,000 total square feet compared to 110,000 total square feet at the end of last year's Q3.

Meanwhile, the retail comp fleet continues to generate great returns with the average store paying back our initial investment in one year.

Our US comp store sales generate the greatest ROI followed by China comp stores due to a low initial buildout cost and inexpensive operating model.

Moving on to the Teva brand.

Third-quarter results were strong and ahead of plan.

This was particularly gratifying given the challenges facing the outdoor retail industry following 2011's unfavorable summer in Europe and winter weather.

Sales increased 22% driven by growth in the US, Europe, and Asia, highlighted by the brand's successful launch in Japan.

From a product perspective, the Teva brand continued its push deeper into closed toe footwear with the introduction of performance in lifestyle bike products and winterized boots.

Leveraging the Teva brands authenticity in sports sandals to develop a broader offering of closed-toe footwear is critical to extending the brand's selling season and increasing its relevancy at retail on a year-round basis.

At the same time, the Teva brand has had recent success with collaborations in Japan that have succeeded in both highlighting the iconic styles while attracting younger, influential and fashion-conscious consumers to the brand.

These initiatives will serve to strengthen Teva brand's relationship with both customers and consumers, create new growth opportunities domestically and overseas and help mitigate some of the volatility brought on by weather and regional economic slowdowns.

The Sanuk brand finished off the spring, summer selling season with good momentum and transitioned smoothly into fall.

After last year's limited test of Chill products, cooler weather versions of our patented Sidewalk Surfers, we entered this fourth quarter with a much larger presence at key retail partners such as Nordstrom, Dillard's, REI and Zappos, to name a few.

The consumer response to our expanded Fall collection has been very positive.

The third quarter also marked the second consecutive quarter of strong eCommerce sales following Sanuk.com switch to our Deckers powered eComm platform.

We are building a strong foundation to support the Sanuk brand as a year-round brand by elevating our marketing and retail presence in delivering fresh, innovative product.

Retailers are taking notice and confidence in the future potential of the Sanuk brand continues to grow evidenced by a significance increase in spring bookings.

I will now turn the call over to Tom for a review of the financials.

Tom?

Thanks, Angel.

Today's earnings release contains a good amount of detail about our third-quarter sales and earnings including sales by brand, channel, and geography.

Therefore I am going to limit my discussion primarily to gross margins, operating expenses, the balance sheet and guidance.

Gross margin for the third quarter was 42.3% compared to 49% in the third quarter last year which was in line with our expectations and guidance.

The 670 basis point decline is primarily attributable to an increase in product costs, as well as lower European margins for UGG and Teva brands.

Total SG&A expense for the quarter was $99.7 million or 26.5% in net sales compared to $112.2 million or 27.1% in net sales a year ago.

Several factors led to the SG&A decrease, including lower performance-based compensation-related expenses, lower legal spend versus a year ago and the positive impact from foreign exchange rate fluctuations.

This was offset by $6.9 million of additional expense related to our retail operations, most of which is for the 29 new retail stores that were not open during the third quarter last year.

Operating expenses were below expectations primarily due to shipped and marketing expenses to the fourth quarter which accounted for roughly $3.4 million, lower sales-related expenses, lower retail expenses, lower depreciation, and compensation-related expenses.

Operating income for the third quarter was $59.6 million compared to $90.7 million last year.

The decline reflects the lower sales figure combined with the pressure on gross margin from higher product costs and a lower mix of international sales versus a year ago.

We recorded income tax expense of $15.9 million in the third quarter compared to $28.3 million in the third quarter last year.

Third-quarter diluted earnings per share of $1.18 was higher than our guidance and compares to $1.59 a year ago.

We achieved our bottom line projections despite the sales shortfall due to lower than projected operating expenses, a lower non-recurring tax rate and a lower outstanding share count as a result of our aggressive repurchase activity.

During the third quarter we bought approximately $85 million of our common stock and have $115 million remaining on the $200 million authorization amounts in July.

These purchases were funded using our cash position and borrowings from our credit facility.

Now turning to the balance sheet, at September 30, 2012, the inventory increased 36.2% to $486.2 million from $356.9 million at September 30, 2011.

By brand compared to September 30, 2011, UGG brand inventory increased $127.8 million to $451.8 million.

Teva brands inventory increased $2.2 million to $19.1 million.

Inventory for the Sanuk brand decreased $0.6 million to $8.6 million and our other brands inventory decreased $0.1 million to $6.7 million.

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

At September 30, 2012, in-line and carryover products represented approximately 94% of total UGG brand inventory for which we have customer orders for approximately 72%.

The products for which we do not have orders are mainly for our direct-to-consumer business and the remainder is for at-once orders.

We have also moved quickly to adjust our receipt date of inventory to better reflect current sales trends and we now expect 2012 year end inventory levels inclusive of our revised outlook for the fourth quarter to be up approximately 20% over the end of last year.

It is important to note that approximately half the projected increase is attributable to higher product costs and expansion of the Consumer Direct business.

The remaining half is due to carryover products and increases in UGG brand spring inventory.

At September 30, 2012, our cash and cash equivalents were $61.6 million compared to $90.4 million at September 30, 2011.

At September 30, 2012, we had $275 million outstanding borrowings under our recently expanded credit facility compared to $45 million a year ago.

The decrease in cash and cash equivalents and increase in outstanding borrowings are attributable to $185 million of stock repurchases over the past year and $76 million of cash payments for capital assets which includes $28.6 million for retail expansion, $27.9 million for the new headquarters facility, and approximately $20 million for IT infrastructure and maintenance.

Now moving on to our outlook.

Based on lower comparable store sales projections, a reduction in expectations for our wholesale business and the impact from our domestic price adjustments, we are lowering our fourth-quarter outlook.

We now expect sales to increase approximately 6% over 2011 levels in the fourth quarter, down from our previous guidance of 19%.

This guidance is based on a projected comp store sales decline of approximately 11%.

We now expect fourth-quarter diluted earnings per share to decrease approximately 14% from 2011 levels to -- compared to our previous guidance for an increase of approximately 22%.

This guidance assumes gross margins of approximately 47%, down from our prior forecast of approximately 50%, due to lower European margins, pricing reductions, and reduced retail sales.

SG&A as a percentage of sales is now projected to be approximately 25% up from our prior forecast of 21%.

The increase is due to the reduction in sales forecast as much of the SG&A costs are fixed as well as the shift to marketing expenses from Q3 to Q4.

For the full year 2012, we now expect sales growth of approximately 5% earnings per share to be down approximately 33% versus prior year.

Regarding total year sales by brand, we now expect UGG brand sales to be flat down from earlier guidance of up 10%, Teva brand sales to be down slightly versus flat to slightly down, Sanuk brand guidance remains at sales of approximately $95 million, other brands down approximately 10%.

We are still in the planning stages and budgeting process for next year.

So, consistent with past practice, we will provide more specific 2013 guidance when we report our Q4 results in February.

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

First, our sheepskin costs for Fall 2013 have declined approximately 11% from Fall 2012 prices.

Taking into account the price adjustments we have already announced, we project reduction in our sheepskin costs will positively impact 2013 gross margins by approximately 150 basis points versus the approximately 500 basis point drag we experienced in 2012.

Second, our plan as of right now is to open a similar amount of new stores in 2013 as we are in 2012.

As Angel earlier outlined, our stores generate some of the highest sales in the square feet in the industry and on average pay back in one year.

Therefore, we believe expansion of our own retail stores continues to be an excellent use of capital going forward.

As with all of our businesses, we continue to monitor performance and will react quickly to adjust our plans if situations change or we are not meeting our targets.

With regard to SG&A, we are still rolling up our forecast and need to complete the fourth quarter before providing specific details on 2013 operating expenses.

However, I will state that we are committed to being flexible with all our expenditures and store opening plans, based on our upcoming Q4 performance and Fall prebook results.

Turning to CAPEX, CAPEX for 2012 is estimated to be $70 million which includes a one-time $16 million for the new headquarters, $38 million for retail stores and the balance of $16 million for IT projects and maintenance.

CAPEX for 2013 based on a similar IT and maintenance budget to this year of roughly $20 million, our projected store opening schedule of $32 million and completion of our new headquarters for $36 million which we are planning to refinance, capital expenditures for 2013 are expected to be $85 million to $90 million, up from an estimated $70 million this year.

So to be clear.

Therefore without the headquarters which we expect to refinance, CAPEX for 2013 is expected to be approximately $50 million, similar to 2012 levels.

Finally, while it is too early to comment specifically on a projected inventory position beyond the end of this year, you heard me say earlier we have already aggressively adjusted our receipts for Q4.

This practice will continue as we move through the quarter and head into Q1.

Keep in mind though we will have roughly nine more stores at the start of next year with current plans to open an additional 30 in 2013.

At the same time, so the sales are projected to remain strong protectively in the first half, all of which can drive overall inventories going forward.

Thanks, Tom.

The recent pickup in sales trends at both wholesale and retail is encouraging and we expect momentum will continue to build as we approach our busiest selling period of the year.

This year has been the most challenging period of my tenure as Chief Executive Officer.

We have dealt with significant headwinds on several fronts that have pressured sales and margins.

And like we have done in the past, we have acted quickly to try to mitigate the risks of the business.

As a reminder, we have party taken steps to mitigate our exposure to sheepskin through new raw material innovations and product diversification.

We have lessened our dependency on Classics with the introduction of compelling new Fashion and Casual collections that are less sensitive to the weather and we have helped smooth out some of the seasonality in our business and offset some of the recent margin pressure with the acquisition of Sanuk.

This is one of the many reasons I'm confident that when we look back on 2012 in years ahead, these results will be viewed as a notable and positive turning point in the Company's history, a time during which we exploited rather than surrendered to forces seemingly outside of our control to build the next generation Deckers as we drive toward increased profitability and enhance shareholder value.

The key here is to build from our strength.

The strength of our brand portfolio.

The year-round and iconic styles that are in our current lineup today as well as those I have seen in the near-term pipeline.

Our strong relationships with major retailers and independent accounts.

The growth potential in our direct-to-consumer channels and emerging regions.

The tangible potential for increased efficiency across product lifecycle and supply chain.

And finally and most importantly, the preference and emotional connection that consumers have with our brands gives me great confidence as does the strength and vitality of the Deckers organization with the highly evolved systems and processes and the passion and tenacity of our people to drive excellence across brands, channels, regions and functions.

Now we are not where we need to be, but we are confident that we are moving in the right direction for the long term.

Thank you.

Operator, I will now be happy to take questions.

(Operator Instructions).

Erinn Murphy, Piper Jaffray.

Good afternoon.

Angel, I was hoping you could maybe talk a little bit more about the pricing adjustment.

It was helpful to see that, the detail you gave.

But, just curious longer term, how confident are you that this is maybe more of just a one-time cut versus a multi-quarter adjustment?

And then in the adjustments you just made, can you speak a little bit more about any impact you are seeing in conversion?

Thank you.

Yes.

We do see this as a one-time situation, that they -- I was always concerned that $200 was the ceiling for example on the Classic Tall.

And it's the consumers out there that are telling us that as much as anything.

They -- especially in these economic times.

So we are also confident that given some improvements we have made in supply chain and in new processes, as I mentioned, that we should be able to hold margins where they need to be and still maintain the appropriate price points for our products.

The other thing that is going on is that there is a lot of innovation happening.

In 2013 you are going to begin to see that.

Some of it in the spring, the bulk of it in the fall which will also allow us to introduce new product at lower price points.

New product at more accessible price points so that first time UGG purchasers.

So I think that is very important.

What was the other question?

Conversion.

(technical difficulty) conversion impact on just the lower pricing even though it's just been about a month, month and a half.

Yes, it's a little early, but not only from our own stores which is actually hard information, but yes, we have seen improvements in conversion and we have had anecdotal information from our retailers that they have seen improvements in conversion as a result of the lower price points.

Then, just a quick follow-up.

As you were talking about maybe introducing some more entry level price point into the mix next year, how are you engineering margins for that product?

Will it be essentially a margin neutral or how should we be thinking about that if you are seeing a mix shift towards a slightly lower price point next year?

It is a combination of a lot of different types of products.

So it is across the board.

In the end it will probably be margin neutral to slightly up.

It just depends on the kind of product, the type of innovation.

We are very, very conscious of our margin objectives and we are being very aggressively innovative to drive those goals home.

Thank you very much.

Mitch Kummetz, Robert W. Baird.

Maybe a question for Tom.

Tom, could you just walk us through how you would get to the implied growth in the fourth quarter?

You guys are now saying flat for the year which if my math is correct that's a 6% increase on the fourth quarter.

I know you already addressed the comp.

You are saying comp down 11%.

Can you maybe just sort of take that brand in Q4 wholesale, retail, eCommerce and just give us a sense as to how it rolls up to 6% growth?

Yes.

I think the best way to describe that is maybe even give you a little frame of reference even from the prior guidance with what kind of changes we made there.

I think the retail when you look at the difference between the old guidance and the new guidance there's roughly $70 million to $80 million of decline in sales.

About $30 million of that is related to retail and about two thirds of that is related to bringing down the comp assumption based on the trends we saw in the third quarter and the balance of the retail as related to the non-comp stores.

And then, pricing at this point in time, early, we wanted -- it's early to make a call on conversion, relative to the improvement in pricing -- that was about $7 million to $10 million of the brand down relative to the old guidance.

And then the wholesale and distributor business globally is a takedown of about $40 million of that and about 3/4 of that is on the domestic wholesale side and the balance, about $10 million, is related to Europe as we continue to be concerned about levels of reorders and cancellations in that market.

Okay.

And then also maybe just along these same lines, some companies are talking about they are giving us sort of a weather assumption.

They are expecting either normal weather or similar weather to a year ago.

I mean, is there a weather assumption that is baked into your guidance on Q4?

And also could you maybe talk about how you are thinking about cancellations, reorders, closeouts in Q4 related to a year ago where I know you had some issues with regard to those areas?

The weather.

I think the best way to approach that is the way we've -- I think a normal weather still.

Somewhere between as warm as it was last year and as cold as it was two years ago.

That being said, how we are -- our comp guidance of a negative 11% is only about a 10% improvement relative to the third quarter.

So if we do get some colder weather, then there may be some opportunities there.

I can't commit to that pretty early.

We have seen some improved trends, but still pretty inconsistent.

As far as the wholesale side of the business, we feel with the recent price adjustment that we have mitigated some of the risks that we were concerned about, relative to cancellations.

So there's not a lot of cancellations being built into the guidance for the fourth quarter.

One last quick one.

In terms of your fourth-quarter gross margin outlook, it has come down 4 points.

How much of that was the impact of the price adjustments and can you give us some sense -- Angel, you referred to the styles that you have taken down prices on.

Could you give us some sense as to what percentage of the overall UGG business those styles represent just so we get a sense of style, how much that has had an impact?

Yes, the impact relative to the price adjustments on the fourth quarter is pretty significant.

That is roughly 1/3 of the bring down in the margin for the quarter.

And in terms of mix I will answer that question.

The fourth quarter has shifted more towards Classic product than some of the other quarters, and as a result of that, the price decline, the price change has a significant more of an impact on the fourth quarter than it would have other quarters.

For example in the third quarter, the price decline was about $3 million to $4 million.

In the fourth quarter it is closer $7 million to $10 million.

That's great.

Thank you very much.

Good luck.

Omar Saad, ISI Group.

Good afternoon.

Angel, you spent some time in your prepared remarks talking about some consumer studies of the UGG brand and the insights it gave you.

Can you talk about what the -- some of the core elements of the loyal consumers that do respond positively in those surveys, what it is they love about the brand?

And what it draws to the brand -- what draws them to the brand, what brings them back?

And how do you, as a company, do a better job leveraging that going forward as you think about how to build this brand holistically?

Well, pretty consistently the core consumer has what we would consider an emotional connection to the brand.

It is about luxurious comfort.

And I have said this for a long time.

The UGG brand became fashionable but at its core it is a comfort brand.

So this is a consumer who really gets accustomed to the feeling of the brand almost as an emotional release.

And we have seen this validated in our research over and over such that she is and typically she is, we all know, to the point where the UGG brand once it is in her closet as either Slippers or Classic and, increasingly, in other styles tends to be a replacement purchase.

And we have -- in markets where we have been operating a long time, we have consumers who as I have said many times and researchers validate it, they buy UGG on an annual basis consistently to replenish what they had in their closet.

Now over the last two years, the impetus to buy the brand in many parts of the country is run by weather.

So when you don't have the cold weather you don't have the same level of impetus.

We are not as top of mind.

And I think that that's a clear indication from the results that we see.

Whenever we get a little spike in colder weather, our performance at retail improves dramatically.

From the point of view of leveraging this information, you are starting to see it in a couple of different areas.

Our efforts in eCommerce, direct-to-consumer, social networking, digital marketing are all very specific to this attitude around this consumer.

We are increasingly able to pinpoint her behavior, pinpoint where she shops, pinpoint where she likes to spend time and begin the process of being very calculated as to where we put our marketing dollar.

So that is just an ongoing insight that we are getting that we are honing as each season progresses.

It also gives us the ability to be a heck of a lot more flexible than we were in the past with our targeted media.

And this allows us combined with the ability that we have to change messages and images on Demandware, which is our platform for eCommerce, it has given us tremendous flexibility.

And the name of the game here in terms of this consumer is to intercept her in all the places that validate and reinforce where she would expect to find the UGG brand and also to give her opportunities to discover the brand if she is not a core user.

So the prospect component of this which which are women who have indicated an interest in purchasing UGG and just haven't done it yet, which represent over 20% of the US population of women, those -- that's another key important part of this effort.

Knowing who she is, knowing how to reach her, knowing when to reach her, those are all really essential parts of that effort going forward with the marketing efforts that we are making.

That's helpful.

And just to be clear it's luxurious comfort, it is not the sheepskin that's the core element or the sheep fur or is it the combination of the three?

It -- the primary vehicle to deliver this to of luxury and comfort is the shearling, is the sheepskin.

And there is a tactile component that translates into an emotional reaction.

And this is a core element of the Classic line of product.

That is why in most of the products you see from UGG, there's always at least a small amount of shearling, a small tactile representation.

Even if we are doing shoes in which the ankle, rather the heel collar lining is sheepskin or the footpad or some other part, there's a touch point of the shearling.

And that is important for the brand.

That is part of what validates the brand as authentic.

And then a question for you and or Tom, the revenue guidance for the fourth quarter, what's different in this?

What is going to be different in the fourth quarter from the third quarter in terms of going from a negative high-single-digit sales number to more of a positive mid-single-digit?

What's the change here?

Especially given these kind of pullbacks in the pricing that you are shipping the new -- you are making your shipments at?

I think they are relative to the difference between what is going to happen in the fourth quarter relative to the third quarter is we did have to see some pressures in our business in the third quarter and we did have those negative retail trends.

But we feel that at this point in time, early in the quarter, we are projecting some improvement a roughly a 10% improvement on the total retail comps for the fourth quarter.

And then we have got more marketing programs in the fourth quarter as well vis a vis the third quarter.

And the pricing really and we currently in our projections we have got pricing impact of about $7 million to $10 million of pressure on the fourth quarter.

That being said, maybe there will be some opportunity to get some increased volumes on with that price change.

So -- and then I think another thing to point to is we are -- eCommerce business continues to exceed plan, continues to be well over the prior year, and we see a lot of eCommerce opportunities still in the fourth quarter.

Thanks.

Jessica Schoen, Barclays Capital.

Good afternoon.

On the price adjustment for -- in the US, I was wondering if you could discuss the decision not to make that price cut in the international regions and if it could potentially have a similar positive impact on demand that you expect to see from the adjustment domestically?

Yes.

In the international markets our pricing did not go up.

They kept -- they were relatively flat to last year.

So the real issue was the US market and that is where we had the consumer pushback more so than any of the other markets.

Understood.

And then on the sheepskin pricing for next year, if I understand correctly, Fall 2013 is when you expect to see the ease in the pressure of those costs and just to think about big picture, what else we can expect to drive the different puts and takes in margins that could also impact how things go next year.

We are still involved in our planning process.

But one thing to think about is, obviously, we made these price changes now though.

That's one thing to consider for the margin.

Internationally, a little bit early there in the planning process in terms of what we may want to do with pricing there, we skip to the fourth quarter and see how pricing behaves haze so to speak in the international markets.

More so, net growth is going to help gross margin and more at this point in time with our current plans for more retail stores, how profitable those are, that could be a put on the gross margin for next year as well.

But again I caution everybody, let's get through this fourth quarter.

We will have a better perspective in terms of what next year's margins will be, what our G&A spend will be as well as our store opening plan.

So, I think that's what I can say right now at this early stage of the game.

Great.

Thank you very much.

Jim Duffy, Stifel Nicolaus.

Thanks.

I'm hoping you can share some perspective on historically what type of linearity you have seen on UGG sellthrough by month?

Is it possible to ballpark in any quantifiable term the positive contribution of each of the months across fourth quarter?

Again, that -- what we've seen is recently is a high correlation even on a weekly basis in the wholesale channel and our own retail stores, given all these factors we talked about.

When the weather turns in the right direction there's some good sellthrough not only with our wholesale customers, but also our own retail stores.

Our eCommerce business doesn't seem to be weather-sensitive.

I think another thing for the fourth quarter that you get a higher correlation of sellthrough as you get closer and closer to the holidays.

That is something there, so --.

So, Tom, historically has December been 50% of sales, less than 50% of sales?

75% of sales?

How much of it is weighted towards the final month of the quarter?

I would say it's more skewed to obviously November and December and it can really load up especially when you consider our direct-to-consumer business growing and our eCommerce business.

Once you get past Thanksgiving, you get a pretty decent size ramp.

Okay and then I am curious about the adjustments you made to inventory deliveries for the fourth quarter.

How much lead time do you need to influence that?

At what point did you make the decision to temper receipts of inventories for the fourth quarter?

Yes, we've -- that's been -- well, obviously, when you are working a supplies chain you are constantly evaluating things like that.

So that has been sort of a gradual process as we have seen the year unfold.

And that will continue.

Like I said, we are going to monitor the fourth quarter very closely and based on the fourth quarter that will -- can have some further input in terms of how we throttle back or throttle down receipts going forward.

You didn't answer the question though.

How much lead time would you need to throttle back receipts?

I would say it's getting shorter, but closer to maybe four, four-and-a-half months.

Thank you.

You know it's -- okay.

Howard Tubin, RBC Capital Markets.

Angel, as you look at everything that is going on in the business now when you look at your wholesale distribution in the US, do you feel the brand is appropriately positioned?

Would you in a perfect world like to maybe clean up distribution in the US and ramp down some of your wholesale customers or would you rather expand wholesale customers?

Or keep it just the same?

Well, I think there's obviously an opportunity with the expansion of our direct-to-consumer business to take a look at what we might consider marginal distribution.

And so that's clearly part of our analysis and our assessment.

We certainly don't think we need more distribution.

We think that, in total, we have the right number of points of distribution, but it is just the quality of some of that distribution needs to be aggressively evaluated.

And we will continue that process.

I think one of the things that's interesting in this particular period is that you really start to understand who those retailers are who got you the brand for the long-term versus those who are in it for just a short-term gain.

And we are paying very, very close attention to all of that behavior.

So that may have some bearing on our decision-making going forward.

Got it.

Thanks.

And how do you feel about inventory currently in the channel, based on current sellthroughs?

Do you think retailers are overinventoried and there is a risk of them getting more promotional with a brand or are they -- or is inventories in the channels pretty much in line with current sellthroughs?

I think inventory in the channel is pretty much in line with expectation.

Again looking toward a slightly more normalized year.

Now if we are sitting here in mid November, early December and it's 75 degrees in New York City, we are going to be overinventoried in the channel.

I can guarantee you that.

So, I think retailers have brought in the appropriate amount of inventory based on last year, which was not a good year for weather.

So we are just sitting here waiting on cold weather.

I hate to -- that is what drives me nuts is just sitting here with this watching the weather report every day.

It's kind of -- now I know what it is like to be in the ski resort industry.

All right.

Thank you very much.

Scott Krasik, BB&T Capital Markets.

Angel, you sort of alluded to it, I think, two questions ago about the distribution.

But relative to the 72% of the in-line inventory that you have earmarked for delivery, I mean, if you see cancellations, do you have a different way of handling closeouts this year?

Will you react by potentially cutting customers off?

How are you treating the inventory you have earmarked for delivery if cancellations increase?

Well, as Tom said, it is high-quality inventory, number one.

So this is a -- the inventory that we're talking about is not fashion-sensitive.

So, as we have done in past years, we do have good relationships with the right people to liquidate some of it.

That is more seasonal.

And we also have the ability to migrate some of that product into 2013 as we have done in the past.

And of course as I said, there may be some retailers that really don't value the long-term opportunity to sell UGG and they will demonstrate that in how they behave.

And we will pay attention.

I appreciate that.

And then, Tom, I think or at least the message that you guys are trying to get across on the call is that you are trying to be very flexible.

Whether it is an inventory, store openings, expenses, so maybe how flexible do you think you really are in your expense structure?

I know you don't want to give FY '13 SG&A guidance, but what type of flexibility do you think you have?

Historically you have seen the number.

There is a fair amount of fixed cost in the structure, but that being said, the fourth quarter let's get through it and see the challenges or the opportunities there and everything in our minds is up for grabs for evaluation, reviews, zero-based approach, those kinds of approaches, to get competitive and work on our margins.

So I think that's the best way to answer that.

Then on the inventory, I just want to follow up on that earlier question on the call.

I mean there is like four to five months' lead times.

But that is something we have already been considering and what kind of first-quarter receipts that we are going to receive.

We evaluated some of those, some of the risk and adjusted inventory receipts.

Talked to the factories in the third quarter, even, on some of these things.

So we are -- store openings as well.

We -- the current thought given the returns on capital of these stores is to open up a similar amount next year.

That being said we are not committed for much more than a handful of additional stores at this point in time as we speak.

So there's a lot of flexibility on the store openings schedule as well.

All right.

Thanks very much.

Camilo Lyon, Canaccord Genuity.

Good afternoon, everyone.

Angel, just trying to parse out some of the weather influence.

Maybe you could share some of the warmer weather climate UGG sales.

You know, the California region or in the Florida region and maybe give us an indication as to the demand trend for the brand where weather doesn't influence that purchasing behavior.

Certainly.

Yes, we haven't seen a falloff in demand for the brand in the warmer markets.

So that has been a good thing.

And I think generally speaking in the market -- well California is a little different.

Because it gets very -- it is cool at night here.

Even year round it is cool at night.

And so people wear it as a comfort shoe in the evenings.

It is not unusual and you have probably seen that as you've traveled around California.

So there is a slight difference in terms of utilization -- use -- usilization of the product.

On the East Coast generally speaking it is humid in the summer, humid at night.

You are not thinking of a shearling boot or a slipper.

So there is that.

But we've answered that because of the product innovation.

You know, there's a lot of spring product that is much more appropriate for warmer climates.

It's quite thin, low pile sort of shearling.

We have got different coming, there are different innovations for breathability.

So all of that is in the works.

And our goal, really, is to focus as much on the comfort component of the brand as on the perceived weather component of the brand.

The two things have to be equal from a product development and technical innovation point of view and that is what we are doing.

You've already begun to see a lot of that with the spring line which performed -- has been performing quite well.

We will continue to do more of that and I think some of the innovation we have in mind and is already implemented should give us more flexibility to design product that is appropriate for almost any climate.

Great.

And maybe shifting gears a little bit.

Can you talk about any changes you might be seeing in the competitive landscape as it relates to the UGG business?

Seems like there's -- few new engines coming into the category and you really haven't had much competition for the past few years.

So if you could share any insights there, that would be great.

Well, actually, we have had a lot of competition in the past few years that has been in the form of counterfeit and been in the form of knockoffs.

And that does represent a significant amount of competition outside of the US as much as in the US.

More so in markets like China, for example.

So we've gotten pretty good at addressing those issues and going after those folks, and that type of competition is insidious, obviously, because they are trading on our intellectual property.

When it comes to competition of other people in the sheepskin business, what we find is that the -- I'm not -- I've never for a minute believed that we would have this category to ourselves.

I think there's always competition in the marketplace.

And that is the power of the brand.

The most important thing we have to focus on is the power of the brand.

And that is why we have been really prioritizing the marketing efforts that we have been making.

Even in many cases where people are confronted with a competitive product at a lower price point, they purchased the UGG product at a higher price point because of the perception of quality and durability, et cetera.

So and there is something different about our sheepskin.

I mean, there is something different about how our product feels.

We intend to continue exploiting opportunities in innovation, design, product quality, and as we have demonstrated with this price adjustment, we are very sensitive to the consumer price value relationship that exists.

So our brand has to offer a variety of price points to consumers, so they can access the brand according to their opportunity.

Now that doesn't mean we are going to go down market and low-quality product, but it means that any reasonable good quality product that can be UGG, we will address it in price points going forward.

Because we don't feel that it's wise to give all that market share up to people who would trade on what we've already done and then come in and undercut us with inferior quality.

So we intend to really pursue that aggressively, but not never compromising the quality of what we are doing.

Okay, thanks.

Then lastly, what would cause you to open fewer retail stores next year?

What would you need to see to pull back on that 30 or so that you talked about since you are only committed on a handful?

I think there would be a lot of factors we would evaluate but one of them would be in the fourth quarter depending on how late we finished the year off.

And let's say we have some worse than expected comps and the weather has cooperated, I think that's something that we would have to consider seriously when evaluating future store opening plans.

And just lastly, could you remind me the split between international and domestic new store openings for next year of that 30?

You know, we haven't -- I think we are still in the planning stages on that.

A year ago the thought was maybe 2/3 of that would probably be international and 1/3 domestically.

But we are still evaluating that as well.

Okay, got it.

Good luck with the balance of the year.

Chris Svezia, Susquehanna Financial Group.

Good afternoon, everybody.

I have a question.

I just want to understand the comp projection for the fourth quarter.

I just want to make sure I have this correct.

So you are expecting your comps to be down 11%.

But, Tom, you are making some comments that you expect it to be up 10%.

I am a little confused by the logic.

Let me clear that up.

Yes.

The third-quarter comp was down about 13%, and at this point in time from a -- given the inconsistency we've seen in the business so far, we want to be cautious and we've modeled an improvement of 10% on that negative 13%.

So that gives you roughly a negative 11% comp.

I see what you're saying.

Okay.

What -- I mean with all the pricing reductions you have done and the changes, when you look at your Company-owned retail business, you've made some comments as the weather is changing.

You have seen some improvement.

Can you share a little more color about what you're seeing because I think that is important.

And if you are seeing any improvement whatsoever, why still such a dramatic negative comp, for the fourth quarter against an easy comparison?

When you look over a two-year stack basis it's implying a very, very negative trend in that fourth quarter.

So maybe just talk about that a little bit?

Yes.

It is early in the quarter.

The results to date although better have been inconsistent.

They seem to be more weather-dependent than we have historically seen.

It is not an execution thing.

It is not an operation thing.

It is not an availability of inventory thing.

It is just early in the quarter and we want to be cautious from that point of view.

And just on the wholesale business, when you mentioned on the inventory you said that you weren't anticipating any cancellations.

Can you clarify that comment on the cancellation rate for the fourth quarter on the wholesale business?

You made some comment about pricing reductions and therefore you didn't need to have cancellations.

I just want to understand.

So, some of the -- another element of the background relative to adjusting prices was to be cautious about what cancellations may occur in the fourth quarter.

So that was also another decision factor in the price change.

So at this point in time, there's still -- i.e., in the footwear business, there is opportunity for cancellations, but given where we are at right now, we haven't really modeled any cancellations of any significance into the fourth-quarter guidance.

And I guess that would change.

I mean if the weather turned against you obviously that would change that picture there?

Is that fair to say?

Going back (multiple speakers).

Yes, it would certainly be something that the major players would have to consider.

Gets back to Angel, like you said, gets back to Angel's comment whatever their inventory level is.

Okay and then just, lastly, just on the international side which you haven't really talked too much about.

I guess what are your thoughts as you move forward?

I mean you tailed a little bit worse than I guess I thought it would've been, but can you talk about some of the other markets?

Just visibility there, just your thoughts going forward, any potential turn, anything at all as it pertains to the international side of the business.

Yes.

I will give you some color on that.

For the fourth quarter that -- when I talked about some of the European wholesale and distributor business being down some, that is really not a UK phenomenon.

That business has still some challenges, but it's really more of a Netherlands, part of the Benelux phenomenon.

And then our Japanese wholesale business continues to grow.

We are pleased about that.

And also in Asia-Pacific, we have a new distributor in Korea, good-sized footwear market.

We are excited about that opportunity.

And we are excited about other launching other brands into China.

And then, there's Latin America as well.

We are going to -- we won't get into some of our strategic planning related to Latin America, but essentially not there now.

There's an opportunity there as well.

Yes.

There is -- we tend to focus on UGG in these conversations on these calls.

But the fact is that Sanuk has a significant opportunity with retail, particularly around the world.

They currently operate over 50 stores.

They are distributor-owned stores in Asia.

They perform quite well.

They are not expensive to put up and excellent margins.

So that is an opportunity.

The other thing, let me just say this about the UK.

Our business in UK is actually improving and improving significantly from -- certainly from a cleaning up the distribution sort of point of view, we have a lot less promotional activity that is going on there now as a result of the team's effort to clean things up.

We look a lot better at retail in terms of spread and assortment of product versus just being very Classic-focused as we were in past years.

So that, I think, bodes well and that business has very certainly stabilized.

As Tom said, it's Benelux and the economic downturn there that has been the issue in Europe.

All the best.

Thanks.

Christian Buss, Credit Suisse.

I was wondering if you could talk a bit about the cadence of SG&A?

The declines this quarter and what implied acceleration of SG&A spin in the fourth quarter?

Can you walk me through the puts and takes there a little bit?

Yes, in the third quarter we had a commbination of things going on in the third quarter.

Some of which -- mainly some marketing close to $4 million a shift to the fourth quarter.

We had some FX benefit in the fourth quarter in SG&A.

Some of the retail expenses came in lower than planned, lower legal expenses than originally planned.

And then you move into the fourth quarter, you are going to pick up that marketing expense and you're going to open up more retail stores.

And I think that fourth quarter is obviously a big -- the biggest SG&A quarter.

More marketing, significantly more relative to the prior year in the fourth quarter.

So that's --.

That's helpful.

And did you make any shift in your planning for discretionary SG&A spending?

Have there been any reductions, any headcount reductions or any proactive shift in the SG&A spend?

To my earlier points we have been very cautious there and very prudent there in terms of managing manpower, managing the growth of manpower in the fourth quarter, been more cautious on some legal terms of how we can be even more productive.

We are very productive from an anti-counterfeit perspective and finding the bad guys around the world.

But we are more and more evaluating more effective methods to do that, and most of the time, those are more cost-effective methods.

So, those are some just some of the initiatives that we have undertaken to try to control SG&A.

That's helpful.

Thank you very much and best of luck this quarter.

Diana Katz, Lazard Capital Markets.

On the price adjustments domestically, can you comment on the decision to limit the adjustments to just three styles?

There's still quite a few Classic boots with higher prices year over year like the Daily Triples still at $230.

Why keep the prices on the other styles?

Those were the key styles.

Those were the more significant styles.

We really -- it's a combination of the volume we do in those products and what consumers told us.

That's really where the pain points were for our consumers.

So that's why that decision.

We feel that on the -- like, for example, the Fashion product and non Classic boots are priced well for the quality that we have in the product.

And we have seen lots of boots out there in the market at $180 and $200, but frankly the quality is not what we would feel acceptable.

So we are trying to work very hard to offer better quality at the most competitive price we can and as the next year rolls around with some of the innovations, you are going to see even more of that.

Just on the Fashion side of UGGs, do you feel that you have the right fashion this season and are you open to considering promoting your Fashion products when needed to be more in line with how your competitors are running their businesses?

We feel that we have the right fashion once the product was delivered as I mentioned.

There were some late deliveries.

And so, what people may have seen is our Fashion collection early in the season.

If they go out and look at the line now, they will see it is a much more complete assortment primarily because we had late deliveries from factories.

So and our performance at retail with those products has improved significantly since the complete line arrived at retail.

In terms of how people operate.

That is up to the retailer.

They will make decisions about what they do.

Our approach is to offer the best quality product we can at a very fair price.

We have been constrained again, as I said, because of the sheepskin pricing and we feel that those constraints are being mitigated through everything we are doing for next year.

So you are going to see next year much sharper price points, given some of this innovation, and more aggressive approach to our assortment and being very precise about the kind of assortments we put together.

In other words we now have had enough experience in the fashion boot market that we have a sense of what is appropriate UGG product, what people want from us and what opportunities there are.

And we intend to be very competitive in going out and getting that.

Great.

Tom, you mentioned in Europe, when discussing the businesses there, some issues in the Netherlands.

Can you elaborate on that?

Yes, that is our Benelux region that we were direct in there.

And that market has been a challenge.

If you drill down into the macro issues in Europe, the Netherlands has had many issues there.

They have had some weather as well.

But that market is characterized by a lot of smaller independents as opposed to major retailers.

So as a result of that, they are more sensitive to macroeconomic issues and inventory buildup because of weather and things like that.

So that has been the issue there.

And just to remind me, is the Benelux larger than the UK of the market for you?

No.

It's a smaller market.

Smaller market.

Smaller market.

I mean smaller market.

Thank you.

Best of luck in 4Q.

Thank you.

Ladies and gentlemen, that does conclude today's question-and-answer session.

At this time, I would like to turn the conference back to our speakers for any additional or closing remarks.

Thank you very much everyone for participating on the call.

I hope you get the sense that we are certainly not sitting here waiting for the weather to punch us in the face.

That is not our approach.

We have been proactive at controlling expenses.

We have been proactive at innovating new products.

We have been proactive at expanding retail opportunities to maximize profitability.

And we will continue to do that and I think the key word is flexibility, where we have looked at our business and said, okay, what are the things that we need to address, to continue to be a profitable, great opportunity for investors.

And that is our long-term objective.

And we will continue to perform.

Obviously this is not the quarter in which we are feeling great about everything.

But we are feeling great about our strategy.

We are feeling great about our brand and we will make whatever necessary changes we need to make to assure a profitable future.

Thank you all very much.

That does conclude today's conference call.

Thank you for your participation.