Deckers Outdoor Corp (DECK) 2015 Q2 法說會逐字稿

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

Welcome to the Deckers Brands second quarter FY15 earnings conference call.

(Operator Instructions) I would now like to remind everyone that this conference call is being recorded.

I will now turn the call over to Linda Pazin, Vice President of Investor Relations and Corporate Communications.

Welcome, everyone, joining us today.

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 are forward-looking statements within the meaning of the federal security 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.

All statements other than statements of historical fact are forward-looking statements.

These forward-looking statements include statements related to the Company's anticipated financial performance, including its projected revenues, expenses, gross margin, operating margin, capital expenditures, earnings per share and effective tax rate.

These statements may also relate to the Company's brand strategies, store expansion plans, inventory management systems, and customer retention policies, as well is 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.

The Company's business is subject to a number of risks and uncertainties, some of which may be beyond its control and actual results may differ materially from the results expected at the current time.

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

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

The Company disclaims any intent or obligation to update any forward-looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations, except as required by applicable law or the rules of the New York Stock Exchange.

As a reminder, we have posted supplemental information about the 2015 second quarter in a document entitled Second Fiscal Quarter 2015 Commentary.

This document is on our corporate website at www.deckers.com.

You can access this document by clicking on the Investor Information tab and then scrolling down to the featured reports heading.

We believe the approach of providing this additional background information to you will make it easier for you to digest the financial information from the quarter and free up more time and the call for explanations of our performance and outlook, discussions of our strategic initiatives, and Q&A.

With that, I'll now turn it over to President, Chief Executive Officer, and Chair of the Board of Directors, Angel Martinez.

Well, thanks, Linda, and hello, everyone.

Tom George, Chief Financial Officer; Dave Powers, President, Omni-Channel; and Zohar Ziv, Chief Operating Officer, are also on the call.

We delivered a very solid quarter with revenues and earnings up over 20% compared to the same period a year ago.

Anchored by our Company-wide consumer centric focus, we believe our evolving Omni-Channel strategy and compelling product offering has allowed us to drive increased conversions across our retail and E-Commerce channels.

We believe that our current momentum has the Company well-positioned as we head into our biggest, most important selling season.

Our second quarter, the quarter ending September 30, is a transitional period for our business.

The UGG, Teva, and Sanuk brands summer collections wrapped up a solid selling season as consumers responded favorably to our improved offering of sandals and casual shoes.

At the same time, HOKA continued to grow at a rapid pace driven by increased distribution of the brand's innovative running shoes that are now reaching a broader consumer audience.

We started shipping our fall collections for our global wholesale accounts in the second fiscal quarter, and began resetting the presentations in our Direct-to-Consumer channel to reflect the change in seasons.

This fall, we focused the UGG brand on providing consumers with a more compelling offering of casual fall boots and shoes featuring a sharper opening price point.

Our strategy had a positive impact on our sell-in which was the primary driver of our second fiscal quarter growth.

Sell-in for the fiscal quarter was ahead of our projections as some international and domestic wholesale customers requested earlier deliveries into this quarter.

In terms of sell-through, it has been a good start to the fall with consumer demand for our collections up nicely over last year and in line with our expectations.

Starting with the UGG brand, transitional sneakers, casuals, and slippers sold well early in the second quarter, and this was followed by casual boots, as consumers responded positively to the styling and stronger price value relationship we introduced this year.

With temperatures turning cold in recent weeks, sell-through of weather boots and classics have gained pace across the majority of our markets.

As we move deeper into the fall season, our classics including specialty classics, slippers, fashion and cold-weather boots, historically our best-selling collections, will become a better percentage a bigger percentage of our merchandise offering and the focus of our marketing efforts.

We're also having success outside of women's.

Men's casual shoes and boots have consistently sold well since our This Is UGG campaign with Tom Brady kicked off at that start of the NFL season.

At the same time, early reads on UGG home and loungewear, two small but burgeoning categories for the brand, have been very strong.

Both of these categories will have strong presentation this fall and holiday in our DTC channel, as well as in many of our important wholesale customers including Nordstrom, Dillard's and Neiman Marcus.

So overall we're clearly seeing the benefits of our expanded UGG product line as we build on the strength of the UGG brand to increase our exposure to new audiences and improve our performance across all seasons.

Teva's performance continues to benefit from the work we've done positioning the brand's Original Sport Sandal with promotional platforms and events that are culturally relevant to today's market and the audience we want to reach.

Our integrated digital PR, social and sponsorship campaign has generated over 500 million impressions year-to-date, significantly broadening Teva's consumer reach.

The Originals Collection has been a halo for the brand's entire product line, helping drive sales of flip-flops, casual shoes and boots, and hiking boots during the second quarter.

To build on current momentum and extend the brand's selling season, this month we launched an innovative collaboration campaign with Woolrich titled Socks and Sandals.

The collaboration pairs wool blend socks from Woolrich to complete the patterned webbing and color ways of the original Universal Sandal and is exclusively being sold at Urban Outfitters, teva.com, and woolrich.com.

In addition, we are pulling forward a select 2015 introductions in time for the start of the gift giving season to further support selling, especially in warmer weather locations.

Looking ahead to next year, we are refreshing our Originals line with new colors and new materials, while at the same time leveraging the Originals DNA to launch a new collection of lifestyle footwear featuring canvas casuals and boots for men and women.

Turning to Sanuk, sales of women's sandals, especially from the brand's popular Yoga Mat collection, performed very well during the quarter.

On the men's side, new styles of the brand's iconic Sidewalk Surfer, as well as new canvas casuals helped drive sales.

The plan is to build early momentum for spring 2015 over the next two quarters by emphasizing new product introductions in stores and on our website including women's yoga ballet flats, our women's Cat collection of casual contemporary shoes, and men's casual with a focus on the stylish Boulevard Collection.

We believe that we have a great long-term potential for Sanuk with the casual footwear market and believe that we can leverage the brand's authentic surf heritage into more mainstream opportunities.

Turning to HOKA, the second fiscal quarter was highlighted by the introduction of the award-winning Clifton, which had a very positive impact on the brand's performance and market perception.

With a more commercialize aesthetic, the Clifton has broadened HOKA's consumer appeal and helped bolster its position as a serious player in the highly competitive world of performance running.

The Clifton won Editor's Choice awards from both Runner's World and Competitive magazine which has validated HOKA for many runners.

The recognition and broad appeal of the Clifton has come at an important time for the brand as we prepare to expand distribution of HOKA beyond running specialty doors and international sporting goods chains early next year.

We expect to add distribution at The Sports Authority, Finish Line, and Hibbett Sports starting in January of 2015.

These sporting goods chains, combined with Sports Chalet and others, will put us in 100 sporting goods stores by spring of 2015, and in addition, we're launching a trail running shoe exclusively for REI called the Challenger ATR, which will be featured this holiday season in all 136 REI doors.

So overall, we are very pleased with how the brand is progressing at this stage, and we're excited about the broader distribution opportunities that lie ahead.

In support of our strong product collections this holiday season, we've invested in our most comprehensive marketing plan to date.

This is UGG, the brand's first global brand marketing campaign, which launched in mid-August, will anchor our consumers outreach strategies across all media including print, digital, social, in-store, and out-of-home.

Continuing with the theme of connecting with consumers on a more emotional level, by showing how the brand fits into consumers' lives, we created four extensions of This is UGG for the holidays -- This Is Magic, This Is Joy, This Is Warmth, and This Is Cheer.

Each showcases a different key holiday classic or slipper style against the backdrop of a creatively executed snowflake.

This campaign will feature both women's and men's styles and will have a focus on gift giving.

We are also incorporating a new classics campaign aimed at generating top-of-mind awareness of our classic products, reminding consumers of the love for our heritage iconic boots and their special place in their lives.

Our holiday media plan launches on November 17 and runs until December 28.

For this period, we're taking the wins from a successful holiday campaign last year and expanding our relationship with our top-performing partners to create targeted advertisements that spike at key times during the season.

We'll also be very active on social media with content that ties to seasonal events such as the arrival of cold wet weather, holiday travel, and, of course, gift giving as the UGG brand is one of the most sought after holiday gifts in the world.

I should note that our new weather-related creative on the UGG site and merchandising focus is also helping drive conversion and sales in our women's boots category.

We are seeing that there is a very attractive opportunity for the UGG brand to grow in the rainy weather category, and we intend to put more focus on this area in the fourth quarter.

We're really excited about what we've planned from a product and marketing standpoint for the holidays and we believe that our combined efforts will drive consumers to our global Omni-Channel network of retail stores, E-Commerce websites and wholesale partners.

Now let me turn the call over to Dave, who will discuss our Direct-to-Consumer business and our international wholesale and distributor businesses in more detail.

Dave?

Thanks, Angel.

Our Direct-to-Consumer business posted a solid gain with second fiscal quarter total sales increasing approximately 26% over the same period last year, and DTC comparable sales, which includes combined worldwide retail same-store sales and worldwide E-Commerce sales, increasing approximately 3% compared to the same period last year.

Store traffic was challenging this quarter, particularly in areas that experienced above average temperatures during September such as the Western US and Europe.

We were able to partially offset this headwind by improving conversion by double digits versus a year ago, which we believe underscores the effectiveness of our recent efforts to elevate the in-store experience and expand the breadth of our product offering.

We remain focused on evolving our DTC model to quickly adapt to changing consumer shopping behaviors and preferences.

As we continue to innovate, we believe the net effect will be consistent growth of our overall DTC business and a positive impact on the Company's profitability.

We are continuing to see the benefits stores have on E-Commerce sales in markets where we have opened new stores confirming our Omni-Channel approach to creating a seamless shopping experience for consumers.

In North America markets where we have opened up stores in the last 12 months, traffic to the UGG site is up on average over 20% compared with a year ago.

Further, while revenue for the UGG brand in North America through our E-Commerce site was up approximately 29% in total compared to the same period a year ago, we've seen even higher sales in markets where we have opened stores.

We expect this trend will continue when we open more stores in underpenetrated high traffic areas.

We believe that the advancement of our Omni-Channel strategy and the continued rollout of several consumer centric initiatives are also fueling growth for the DTC channel.

Infinite UGG, which gives our retail stores the ability to sell every SKU available from the UGG brand through our in-store POS system, is enhancing the consumer experience, improving our inventory productivity, and driving higher sales.

We recently expanded Infinite UGG to all stores in North America and all concept stores in Japan and launched the program in Europe.

These sales are captured in E-Commerce, thus contributing to that growth of total DTC.

We continue to see positive results from Infinite UGG driving revenue to E-Commerce.

As these channels continue to become increasingly integrated, beginning next fiscal year, we will only report a combined DTC comp number to reflect our Omni-Channel view of the business.

This year we saw our summer casuals and sneakers continue to sell well later in the season than in years past.

In addition, many of our new fall casual styles carry sharper price points compared to last year.

This combination of factors caused our average transaction value to decrease which contributed in part to our second fiscal quarter comp store performance.

Initial sell-through of our fall 2014 collections has been very solid indicating a positive consumer response to the merchandise offering, and our increase in conversions supports our belief that consumers are finding the right product at attractive price points.

However, the sharper price points have made it difficult to anniversary the average transaction value from a year ago.

We expect this headwind to lessen in the third and fourth fiscal quarters when classics, weather, and winter products become a much larger percentage of our product mix.

By region, Asia Pacific DTC comps increased 13% to the same period last year fueled by strong trends in both Japan and China.

North America DTC comps rose 4%, and EMEA DTC comps decreased 10%.

As we head into the busiest selling period for our DTC channel, in which close to 80% of DTC revenues are generated in the third and fourth quarters, we feel good about our prospects for growth and believe that we can improve comp store performance.

Our optimism stems from several initiatives.

Beginning with marketing, our This is UGG campaign, which successfully positioned UGG as a year-round premium lifestyle brand through a casual and fashion offerings during the second fiscal quarter, shifts to showcasing our classics, slippers, weather boots, loungewear and gift giving products for the holidays.

Our mix of marketing activities is heavily geared towards driving traffic to our brand and driving demand online and in stores for key styles.

We are doing this through an elevated focus on paid media and search optimization.

As Angel mentioned, our holiday programs launch November 17 and the number of activations will ramp up over the Black Friday and Cyber Monday weekend.

This includes Europe where we historically have held back the majority of our marketing dollars until the weeks right before Christmas.

For this holiday, we are elevating service across all our DTC channels to make it as easy as possible for our consumers to purchase our products.

We've expanded our retail inventory online feature to all concept stores in North America and the UK, and are seeing really good customer response to buy online, pickup in store, or as they call it in Europe, click-and-collect.

We will also be providing same-day delivery storage in our Manhattan stores as part of our holiday concierge message that highlights how we can make the consumer's shopping experience easier during the busiest season of the year.

And, of course, consumers can buy online and return to any store or vice versa, which is whatever is easier for them.

We'll also take returns on product purchased from authorized UGG brand retailers.

We believe consumers are responding favorably to our Omni-Channel capabilities and find that we offer a level of in-store technology and service that is above and beyond many other retailers.

To fully maximize the potential of our brands and our Omni-Channel vision we plan to continue to expand our physical and digital footprints.

Year-to-date, we have opened 18 new Company-operated retail stores including 10 in Asia Pacific, where we currently experience the highest returns and highest productivity, and eight in North America which had been a mix of high return outlet locations and high-traffic concept stores in major metropolitan cities.

Included in our new fleet is a technology driven concept store in Tysons Galleria, just outside Washington DC, that will open next month.

In this store, we will integrate elements of online shopping into the brick-and-mortar experience as we test ways to potentially develop more efficient concept stores for the future.

This winter we are also testing pop-up locations including our first ever UGG lounge store.

This store will feature our luxuriously comfortable slippers, loungewear, and home products, and will be open from October through early February.

Finally, with respect to our DTC expansion, we launched new country specific E-Commerce sites for the UGG brand in Germany and Italy during the second fiscal quarter.

And, in fact, we were recently named of the top Internet site by Elle magazine in China.

Similar to the US, this is a key fashion publication in China and the award demonstrates our progress in delivering an attractive and compelling online experience.

Turning to our international wholesale and distributor business, our newly formed Germany subsidiary has gotten off to a very good start.

Our strong performance in Germany during the second fiscal quarter reinforces our decision to convert from a distributor model and take more direct control of our brands in this large and important European market.

Specifically, in the UK and France, traffic was challenging at the majority of our key wholesale partners due in part to the challenging macroeconomic conditions and average temperatures that were 10 degrees above last year during August and September.

Looking ahead, our fall pre-book in Europe is up nicely over last year which is a positive sign for the health of our brands in the region, and, therefore, if we get normal winter conditions in northern Europe, we expect solid sell-through to drive reorders during late Q3 and Q4.

In Asia Pacific, we launched our partner retail program in China which for reporting purposes are treated as wholesale accounts.

During the second quarter, nine partner doors in total opened, while at the same time, we transitioned seven Company-operated stores to the partner program.

These were locations that were outside major metropolitan cities which we believe will be better served by local market operators.

This will allow our China team to better focus their time and resources on driving sales in stores that are in the nine cities that we have identified as providing the best returns on investments.

We expect an additional five partner doors in China to open by the end of this fiscal third quarter.

In summary, we believe our global Omni-Channel strategy is paying off and that the initiatives we are driving across all channels have put us in a sound position heading into the busiest selling season of the year.

From an organizational standpoint, we've made great strides in being able to better micro merchandise our assortments by country and execute more targeted marketing campaigns that connect with consumers on a more individual basis.

Despite our store comp in the second quarter, which was a relatively small percentage of the total revenue, we are confident that our multi-channel approach has given us the leverage to react to global trends and challenges.

Our nimble marketing capabilities, product diversification, and evolving retail model, which now includes pop-ups and partner stores, is helping us quickly adjust plans in season to drive category and channel growth.

We believe that our initiatives will continue to elevate our brands above the competition and once again make UGG the number one most desired brand this holiday season.

With that, I'll turn the call over to Tom.

Tom?

Thanks, Dave.

As Linda reminded everyone at the beginning of the call, we posted a quarterly financials to our IR website.

So my comments on the call are going to be brief and focused primarily on the guidance.

We had a strong second quarter.

We exceeded our revenue guidance by approximately $22 million and exceeded our EPS guidance by $0.19.

The upside revenue was driven mostly by the timing of domestic and international wholesale sales which shifted into the second quarter and out of the third quarter.

The $0.19 EPS increase over guidance is due to the higher sales recorded in the quarter combined with a shift to some planned marketing expenses to the third fiscal quarter.

We plan to increase marketing expenditures in Q3 and Q4 to drive traffic to our brick-and-mortar locations and to our online sites.

Based on the UGG brand's second fiscal quarter performance, strong backlog, and E-Commerce trends we are raising our full year outlook.

For the fiscal year ending March 31, 2015, we now anticipate revenue to increase approximately 15% to $1.825 billion, up from the previous guidance of 14%.

UGG brand revenue is now projected to increase approximately 14% versus our prior expectation of approximately 12%.

Diluted earnings per share is now expected to increase approximately 15.8% to $4.71, up from our previous guidance of 14.5% growth.

This guidance assumes a gross profit margin of approximately 49% and SG&A as a percentage of sales of approximately 36%, and an operating margin of approximately 13%.

Our fiscal FY15 guidance assumes that the Company's effective tax rate will be approximately 29%.

Wholesale and distributor sales for all brands are still projected to be up low-double-digits in FY15, driven by our Germany conversion, a high-single-digit increase in UGG domestic sales, and continued growth of the HOKA brand.

For our DTC channel, our overall sales projections have increased slightly due to the stronger E-Commerce trends for the UGG brand, which are being partially offset by lower store comp projections of flat to down slightly.

We are now planning for the addition of approximately 30 new stores this fiscal year as we shifted some of our planned concept stores in China to partner stores.

For the third quarter of FY15, ending December 31, 2014, we currently expect revenues to increase approximately 10% compared to the same period in the prior year, and diluted earnings per share to increase approximately 10% to $4.46 per share compared to the same period in the prior year.

For the fourth quarter of FY15, ending March 31, we currently expect revenues to increase approximately 10% compared to the same period in the prior year and we expect diluted earnings per share of $0.15 per share compared to a loss per share of $0.08 for the same period in the prior year.

Finally, we recently completed our sheepskin negotiations for fall 2015 and spring 2016.

Lower sheepskin costs per square foot and lower cost to produce UGGpure, along with higher UGGpure usage will result in a mid-single-digit decrease compared to the last year.

This benefit will partially be offset by higher prices for other raw materials, namely leather, and an expected carryover of sheepskin inventory at higher prices.

Based on these factors, we believe this will contribute roughly a 40- to 50-basis-point improvement in FY16 gross margins over projected FY15 levels.

Lastly, we wanted to let everybody know that we will be hosting our first investor and analyst day at our new headquarters on June 18, 2015.

I'll now turn it back over to Angel for the closing comments.

Thanks, Tom.

Well, the changes taking place in the retail environment are nothing short of dramatic.

The consumer is now completely in charge and is dictating what distribution models will work and what models will fail at a rapid pace.

The days of visiting the mall to peruse and shop have changed and are evolving.

Now it's all about building strong brands and creating access to product through integrated multi-channel distribution platforms that make it as convenient as possible for consumers to review and purchase the products they want.

And we believe that the investments we're making to further develop and strengthen our brands, to build our DTC footprint, and evolve our Omni-Channel strategy are driven by this dynamic.

The consumer is at the center of everything we do and we believe our efforts to date are, in fact, positively transforming our growth trajectory.

We're better connecting with and serving consumers on their terms.

The recent change in our corporate identity to Deckers Brands reflects our successful transition from a domestic footwear wholesaler into a global multi-brand operator.

It also encompasses the dynamic nature of our Company, our talented employees, the breath of our quality, innovative products, and our commitment to providing consumers with seamless shopping experiences.

Not too long ago, we were facing an increasingly volatile market for sheepskin that was impacting our margins.

We addressed this challenge head-on through the rapid development and rollout of UGGpure, which allowed us to strengthen our footing significantly in negotiating and stabilizing prices.

At the same time, UGGpure has allowed us to expand our product line and diversify to new categories supporting our ability to deliver robust growth in a less than perfect environment.

The development of this initiative and this innovative new material speaks to the nimbleness and the adaptability of this organization, and gives me great confidence that we can continue to stay ahead of the pack as the global marketplace continues to evolve.

As a whole, the industry is seeing traffic declines and macro shifts.

We believe that are Omni-Channel approach will put us in the optimal position to address these macro shifts in the retail environment.

We plan to continue to learn and adapt our strategy as necessary to address these issues in real time.

Going into our peak selling season, we believe that we can continue to drive strong sales and earnings growth, notwithstanding a mixed macroeconomic backdrop and continued pressure on the consumer.

We believe we are making the right choices and making the necessary investments in our business to not only adjust to how consumers shop today, but to thrive in this continually challenging global retail environment.

But we can never rest.

And along the way, we will continue to refine our strategy and stay ahead of the curve with the goal of ensuring that we maximize our results for the benefit of our shareholders while supporting the long-term growth of our brands.

Operator, we are now ready for questions.

(Operator Instructions) Bob Drbul with Nomura.

Good evening.

Good evening.

I guess I have two questions.

The first one is for Tom.

On the shipments that went from the second quarter into the third quarter, could you just talk -- you put any numbers around that?

And just similarly, the marketing dollars that your increasing, could you just quantify either the percentage or how we should be thinking about that expense as we look into the -- I guess, you're third quarter now?

Yes, so, Bob, it was some shifting of some revenues from the third quarter into the second quarter.

And if you look at -- I'll give you a couple answers to this.

So it was a $22 million revenue beat, about $15 million or $16 million of that roughly was related to the wholesale business, and that equated to about two-thirds of the EPS beat.

And then the balance of the beat, about one-third of the EPS beat, was due to expenses, and that is about $4 million of marketing expenses.

Camilo Lyon with Canaccord Genuity.

Hey, guys.

Nice quarter.

I wanted just to get a little bit more detail on what you're seeing from your wholesale partners since they've clearly increased their deliveries with you.

Does that mean that this is fast forwarding the re-order window for you?

Or are they just wanting to have more inventory on the floor earlier in the season?

I'm just trying to parse out the trajectory of this fast forwarding of deliveries and how that could affect the re-order window?

Hi, Camilo.

Yes.

We've had good sell-through so far on the fashion styles so -- which I think has given people a lot of confidence.

There was also, as we went into the season, pretty low inventories on product.

I think retailers last year were caught short of inventory, so we've had people really step up in anticipation of normalized selling, wanting to make sure they're not caught like they were last year.

And the other component is the sell-through of a lot of the new styles and classic derivatives, for example, I think that that's been very well received.

It's sold in very well.

There was a lot of anticipation in the early response that that's going to perform.

And, again, I think people want to make sure they're covered with inventory.

Evren Kopelman with Wells Fargo.

Thank you.

Great quarter.

My question is on some of your comments around the comps.

One of them is, you mentioned the average transaction value was down and your expectation maybe that headwind will lessen into the next two quarters.

Can you put some quantification around that in terms of maybe how much of a pressure it was and how much it will go away?

And then, secondly, you also mentioned comps in the Western US and Europe where it was warm.

Can you give us any commentary on how comps were in the other regions to maybe give us an indication of more normalized comp trends?

Thank you.

Sure.

So to address the comp issue, one of the things that happened this quarter is that the summer selling season extended.

So what happened with regards to the AUR, and our average transactions in our stores, is the consumers were coming in and they were purchasing -- our conversion was up 15% globally in our retail stores, but what they were purchasing was sneakers, summer casuals, more transitional product versus last year at that time they were purchasing more boots.

And so what we've seen is the weather has impacted traffic in places like Europe and the western United States, and has delayed the fall selling season a little bit.

In markets where the weather has cooperated and has been a little bit stronger in the regions we have seen a better comp results.

So our expectations for going forward is that when that kicks in and our selling season kicks in, the mix of product will shift away from that summer casual transitional sneaker business into our core competencies of boots, winter product, going into the holiday season.

That will help dramatically in our AUR which will increase, we are estimating about 5% increase in our average transaction price from Q2.

Randy Konik with Jefferies.

Can you hear me?

Yes.

Can you hear me?

Great.

I guess -- can you elaborate on a little bit more on where you think inventories are in the channel right now?

And from your wholesale customers, I guess, second, can you give us a little bit more kind of thought process around, the color around the gross margin guidance for, I guess, next year around UGGpure.

Is that something that's kind of conservative?

And, I guess, the other thing is how do we -- how are we thinking about the potential for SG&A leverage next year?

And finally, from your wholesale customers, how are they kind of ordering on the classic side versus the fashion side of the business right now?

Thanks.

So maybe I'll tackle some of those.

The first one, inventory in the channel, the inventory in the channel is very good.

Feel really good about where that is.

We always have a close collaboration with our wholesale customers on that, so we feel very good where that is at.

Gross margin, sheepskin.

I think those are our best estimates at this point in time based on the negotiation and the elements we talked about in the call.

I think we feel really good about what we've accomplished there with UGGpure and our ability to stabilize our largest commodity cost and continue -- we're on track from a strategy point of view of utilizing UGGpure and we continue to see the benefit of that.

Leather didn't help, but the good news, we had benefit from UGGpure usage and sheepskin contracts that could help offset off that as well.

So we feel really good were that is at.

Go ahead --

And regarding the SG&A leverage -- yes.

That certainly is still the plan.

We expect to gain leverage next year.

I think you see this performance as well as some of our guidance here.

We've done very well starting to get into that ability to gain leverage.

That said, with the opportunity we have with all our brands, this Omni-Channel strategy, we're going to make the appropriate investments to drive a much bigger Company here.

Taposh Bari with Goldman Sachs.

Hey, guys.

Congrats.

Tom, did the quarter effectively meet your expectations?

I know there were a few shifts around timing and expenses, but, I guess, A) did the quarter meet your expectations?

And then, B) how are you thinking about the UGG wholesale growth for the year now?

I don't of my notes are stale, but it looks like the last we heard it was for an up high-single-digit growth rate.

Adjusted for these shifts, it looks like you're running up 20% through the first two quarters of the year.

So regarding the first question, we feel really pleased where the quarter ended up.

We described all those drivers, and regarding our wholesale and our distributor business for the year, the entire Company -- we talked about low-double-digits.

UGG would be lower than that because we've got some strong double-digit growth with Sanuk, Teva, and HOKA.

Sam Poser with Sterne, Agee.

Thank you.

Good afternoon.

Just a couple of things.

One, can you tell us -- you'll say it in the Q, but could give us what the UGG wholesale dollars were for the second quarter, please?

UGG wholesale global dollars were about $340 million.

Okay.

And then, I guess, the other question is, you said on the last call -- you inferred on the last call that the gross margin would be up in Q3 around the same it would be up in Q2.

But it looks like you were up more than you probably anticipated in the second quarter, so how is that playing out?

Yes.

I think, Sam -- that is a little bit more sheepskin and a little bit more benefit in the quarter from the Germany conversion than we originally anticipated.

Jeff Van Sinderen with B. Riley & Co.

Good afternoon.

I'm not sure if you broke out what the actual brick-and-mortar comp was in Q2?

And then, I know you give some commentary around that for Q3, but just wondering what your plan is for brick-and-mortar comp for Q3?

And then, also can you give us more color on the currency translation impact, if there was some in Q2, and then also what you have factored into your guidance for Q3 for currency translation?

Thanks.

Currency for this quarter had not much impact at below both the top line and the bottom line.

Between -- we've got business with the euro, with the pound, with the Japanese yen.

They've sort of balanced out relative to the prior year.

And we also have some natural hedges with the operating expenses there, so the net impact on earnings per share was relatively small, albeit a little bit positive relative to the prior year.

And I think we did break out the brick-and-mortar comp, it was in the press release.

That was a negative 8% -- 8.8%.

Scott Krasik with Buckingham Research Group.

Yes.

Hey, guys.

Thanks.

Just a one clarification first.

The store counts that you're giving us, are those net of conversions?

And then, secondly, in terms of the product line, Angel, this seems to be the first year where you're using UGG Pure to diversify the line and extend it.

Maybe, I'm sure will see it at [Fannie] in December, but maybe talk about how that's evolving for next year.

How much bigger the fall line can be?

I think we'll continue to do what we've been doing and that is to build on categories of product that we know we can successfully exploit.

Meaning that we saw fashion boots as an opportunity.

We clearly saw an entry point with UGG Pure that allowed us to really develop the kind of product that we knew we needed.

And we will continue to evolve that.

TWINSOLE on the men's side has been a very important use of UGG Pure.

We will continue to drive that, we think there's categorization opportunity there.

Our slipper business continues to evolve very, very nicely.

It's very diversified now compared to what it used to be.

As you saw, we also have some new product coming out, and, again, if you haven't seen it, you'll see it during [Fannie.] And Treadlite, which is a very light, it's this RMAT material that a version of which is used for HOKA.

Extremely comfortable, easy-to-wear product that sort of partners with our slipper concept, but is for more streetwear.

So, again -- oh, and then the other thing is the continued -- what we call the UGG Classic derivatives, which are always a fun place for color and materials and doing things that round out the full assortment.

So I think that the -- it's hard to even explain how much of a liberating component UGG Pure has been to the design team and the ability for us to really see no limitation in the kind of product we can create and the categories of product that are now available to us without having the product look distorted because of the thickness of the shearling.

And I think that that's really been super important for the brand.

Scott, just to answer your other question.

The store count is net of the China conversion stores.

Eric Tracy with Janney Capital Markets.

Hi, guys.

Good afternoon.

Congrats on the quarter.

If I could, kind of two separate -- one wholesale and then one DTC.

First on the wholesale, I just kind of want to clarify again -- we're talking about a shift of revs out of 3Q into 2Q, but is it an absolute shift or is it really just sort of a pull forward, again, of your retail partners wanting to be better positioned and, therefore, the re-order still very much to come through in 3Q?

That would be on the wholesale side.

And then on DTC, again, I appreciate the seasonal sort of aspects that are potentially a drag on the brick-and-mortar comp.

Is there any kind of thought at all in terms of structurally, potentially the E-Commerce business cannibalizing a little bit of brick-and-mortar?

And then lastly, just in terms of Europe, DTC, again, do we believe it is all seasonal or anything on a go-forward basis from just the macro that gives you some concern?

I'll answer the wholesale question, Eric.

The shift is timing.

The customers wanted it earlier, so they had an opportunity to get it on the shelf and they can turn more and, therefore, it does have the opportunity to produce more reorders if that were to occur.

Yes.

Eric, with regards to E-Commerce, I'm certain that there is some cannibalization to our stores.

I think we're seeing that in the marketplace.

The consumer is shopping more online, they are starting online before they go to stores.

So I think there is an element of that that's happening to everybody and certainly embedded in our numbers, as well.

What we are seeing, though, which is a very positive sign is how stores are fueling E-Commerce in some regards, as well.

Like I mentioned in the script, in locations where we've opened new stores, we've seen increased penetration in traffic and conversion in sales on our E-Commerce site from those locations.

And at the same time, we are driving incremental sales to E-Commerce site through Infinite UGG, which is sales that we wouldn't have had if we had not had the store there.

So like we said on the last call, the two concepts are feeding each other.

E-Commerce is feeding stores and stores are feeding E-Commerce, and I think that's going to continue, and our model is gearing us up to be ready for the changes in the marketplace and the consumer shopping behaviors which I think will benefit us long term.

With regards to Europe, it really comes down to the fact that September was 10 degrees warmer this year than it was last year.

And that has had an impact on the total market.

I was speaking to our head of our wholesale business in EMEA just this morning and he said that the entire footwear market suffered from that effect.

Doesn't give us a huge amount of concern going forward.

I know that when the weather shifts we will be ready for it, both in wholesale and DTC.

But with regards to DTC, our E-Commerce business continues to be strong, and we are still slowly getting back into the retail game over there.

But our focus will be on Germany for stores next year.

Outside of that, I don't see a lot of new retail locations in Europe other than just Germany for next year.

Corinna Van Der Ghinst with Citi.

Hi.

Thank you.

As a follow-up to the last question, with the earlier shipments and possibility of more reorders in the third quarter, how much capacity would you guys really still have given your [category] inventory management, (inaudible) demand?

And just a bigger picture question, I was wondering if you could talk about how you're feeling about the consumer and the winter weather expectations as you get closer to holiday?

Has your view on either the consumer or the weather changed since we last spoke to you?

Well, I can -- let me just start with that last question.

The consumer -- right now I'd say that there's a lot of pressure on consumers in so many things happening in the -- not only in the macro environment in Europe, but certainly people being nervous about various scares that are being put out in front of them from Ebola to whatever else.

We're seeing some positive signs around our products, our brands continue to be in high demand.

We're seeing great initial read on our new products for this fall.

We think that the diversified product offering has made a huge difference for us.

We're being cautious, however, in understanding that consumers are probably going to be out there a little later than normal.

That would be my guess.

We've also noticed in the last few years that colder weather seems to come a little later than it has in the past, and I think that that's informing some of -- I think our retailers in terms of when they want product -- they want to make sure they're covered early in the season and they want to make sure that we can support them if we get, like we had last year a very extended selling season that goes into what was our Q1 last year would be Q4 this year.

So -- and we're in good position around classic product for those kinds of fill-ins, and that's really how we build our fill-in inventory.

We don't fill-in product that is strictly, say, fashion and very seasonal.

Those, very limited fill-in opportunities on those, but our strength is slippers and classic.

We're in good shape on those, and we historically have been able to meet retailers' needs in what will now be the fourth quarter.

Yes.

The other thing to mention there is that for the fourth quarter, this year, we are in a much better inventory position with winter product.

Last year, we saw high sell-throughs and we ran over product last year going into February.

This year we're much better positioned with winter product and also spring relevant product which is waterproof and water resistant.

Sheepskin at the same time.

As well as new transitional boots that will bring us into the early spring season.

Omar Saad with ISI Group.

Good evening.

Thanks for taking my question.

Follow-up on UGG Pure and I Heart UGG, an update there.

How you're seeing UGG Pure perform with consumers in some of the non-traditional categories?

And then also the I Heart UGG platform, how is that fitting in?

Are you comfortable with how it fits in within the kind of broader UGG brand?

Yes.

As far as UGG Pure, we've had zero pushback from consumers.

It's been extremely well received.

What we did up front is we've said it has to be indiscernible in terms of consumer value and what it delivers from a field point of view and we've achieved that.

It is 100% virgin wool, so really nothing is different in terms of what's contacting your skin.

It is just that the method of production has changed and, obviously, benefited us.

In terms of I Heart UGG, as we said, that was a test and that is a test this fall season.

We are satisfied with the performance.

As you know it was limited distribution.

We are still waiting for our primary selling season to kick in for the colder weather to come, and that's when we'll see where we stand on that product.

We have, however, continued to evolve that product line.

We'll be introducing some for spring, some new product in sneakers and accessories which are very compelling, and all the key price points are met.

So we're going to see how this test goes here in this next quarter and we are able to react accordingly.

But so far so good.

We're feeling pretty good about it at this point.

Christian Buss with Credit Suisse.

Yes.

Hello.

I was wondering if you could provide some perspective on how you're thinking about the development of the European market over the next three to six months?

And what regions are you seeing particular strength, and where are there some challenges?

Sure.

I think we talked about this a little bit on the last call.

Europe presents a pretty dramatic opportunity for us, not only for the UGG brand, but also Teva and HOKA.

From an Omni-Channel perspective with regards to UGG, we still see strong opportunity in E-Commerce and retail stores.

We just opened our Germany site and our Italy site for E-Commerce.

That is going to provide some long-term growth for us and better connection to our customers.

Germany presents the biggest opportunity right now that is in front of us, having just flipped that to a sub.

And we will continue to look at other markets down the road as time evolves, and those markets evolve to see if there's other opportunities for that.

So the brand is strong right now in Europe, and I think we got to elevate our game with regards to an Omni-Channel presentation both in wholesale and retail which will drive incremental growth, but then the market transition of Germany will provide the biggest upside there.

In addition to that, we are also taking a serious look at our partner retail model over there.

And I hope to be in a position in the next six months to be able to say we're going after that in a more aggressive manner with some key partners outside of Western Europe where we can provide incremental growth in some of those emerging markets, as well.

Laurent Vasilescu with Macquarie.

Thank you very much.

Good afternoon.

You had mentioned last quarter that about $17 million of inventory would advance into the first quarter to mitigate a potential port strike.

It sounds like the longshoremen are still at the negotiating table.

So I was wondering if you could provide a little bit of color around your contingency plans for deliveries going forward?

And then the second part is on Ahnu.

I believe it was recently highlighted that the brand will roll out footwear for yoga market.

So could you provide a little bit of color on that front?

What's the opportunity in terms of revenues, when can we see a product in the marketplace?

Thank you very much.

On the port strike, you're right.

We did -- in anticipation this strike, we did bring -- look at what was due.

Brought in about $17 million, $18 million of inventory last quarter.

We still consistently and constantly evaluate that and keep an eye on that.

So most of it is here.

So there's not much risk there at all.

The only risk that we are anticipating there is that we may see a seven-day delay in some shipments if in fact the slowdown gets more aggressive.

But other than that, I think we're in good shape from an inventory point of view.

There should be no risk to what we are looking to ship in the quarter.

As far as Ahnu goes, very exciting to see that product.

We will just now be showing it at the sales meeting coming up.

It's a fall 2015 product offering.

So it's too soon to tell, but we are very excited about the potential.

The brand has many, many fans in the yoga world, and we think we've got some very innovative product to put forward.

So stay tuned on that because we haven't even shown the product to our sales organizations yet.

But there's a lot of excitement, I will say that.

Erinn Murphy with Piper Jaffray.

Great.

Thank you for my taking my question, and congrats on a very solid quarter.

Dave, I just had a clarification question for you on the E-Commerce side of the business.

So when a consumer shopping using Infinite UGG, does that sale get recorded as E-Commerce?

And then, if so, what percent of your E-Commerce business today is store fulfilled sales?

And then, where do you see that potentially moving over time as we continue to see this kind of change in broader customer behavior?

Yes.

Great question, Erinn.

It's a pretty exciting project that we tested last year, and we've seen dramatic increase in those Infinite UGG sales.

In fact, it's up over 100% since we launched it in the same stores a year ago.

It does get booked as an E-Commerce sale, but we, from a store perspective, we motivate the staff by including that in their overall store sales from an accounting perspective.

So they get credit for the sale, but as far as how it is booked, it's an E-Commerce sale.

So far I think it's roughly, just under 4% to 5% of total E-Commerce sales.

And we haven't put a number as a target as to what we think it could be, but it is continuing to increase.

And as we open more stores in more locations that's going to become a more significant part of the E-Commerce business.

The other big benefit of that, obviously, is we gain all that consumer data and we can retarget them and we can build that relationship through the long term in our program.

And as I also mentioned in the call, the Tysons Galleria store that we'll be opening up in November will be our best foot forward as to how we can combine those two worlds, and so it's more of a digital shopping experience in the store, it's much more interactive.

And I think you'll see the opportunity for us to continue to drive sales to both stores and E-Commerce through a more technology driven digital experience in that store, as well.

Chris Svezia with Susquehanna Financial Group.

Good afternoon, everyone.

Thanks for taking my questions.

Nice job.

Dave, for you, just on the DTC -- the physical stores, retail comps -- just confidence in that rebound to get to sort of flattish to slightly up in the back half of the year?

Just so I understand this, it's in part improvement in the seasonality of the business, AUR, marketing and better in-stock?

And the second question I have, Tom, for you -- just to clarify gross margin and SG&A, sort of the cadence Q3/Q4 between year-over-year growth.

Is most of the gross margin improvement Q4, or is it pretty evenly balanced, and how do we think about SG&A dollar growth between Q3 and Q4?

Thanks.

Yes, Chris.

Good question on the comps.

Right now the way we look at Q3 and Q4 -- this is our prime selling season this is where we are at our best, and our best foot forward, as far I'm concerned, from a product offering, an in-store experience, an Omni-Channel capability perspective, and our ability to target and market consumers and drive them to our channel.

So I have a lot of confidence in our team's ability to execute.

And in places where we have seen some cold weather turn we have seen strong results, so I don't look at Q2 results, particularly September, as an indication of what's going to happen going forward.

I see us more normalized seasonality going into Q3 and Q4 getting us back to more normalized comps.

The traffic has been a bit of a challenge in warm weather locations, when that turns we will be fine.

Conversion is up 15% over the last quarter and that will continue.

And when we get into a higher mix of price points through classics, winter and weather-appropriate product, we'll see our ASP continue to increase, as well.

So I would say the combination of all those things, and just being ready and be able to react quickly to the market trends, particularly -- and also into our outlet stores were we have much stronger product than we have ever had before, I think our prospects are pretty strong to get us back to a more healthy comp rate.

And, Chris, on the gross margin, the fourth quarter there will be modest gross margin expansion.

It'll be good gross margin expansion in the third quarter.

From an SG&A growth perspective, the third quarter has more SG&A growth relative to the fourth quarter.

Third quarter is more marketing, more stores.

In the fourth quarter, there's mid-single-digit kind of SG&A growth.

That's because the prior year there was a significant amount of expenses in the fourth quarter as we closed the year off, but at this point in time the way we are guiding won't necessarily recur this fourth quarter.

Jim Duffy with Stifel.

(pause) Mr. Duffy, your line is open.

Sorry about that.

Good afternoon, everyone.

Nice quarter.

A couple questions.

Tom, saw strong gross margins relative to plan in the second quarter.

Why not a more optimistic view on gross margin for the full year guidance?

Are you just being conservative here or is there some rationale why the strength wouldn't continue?

And then, secondly, Angel, in response to Camilo's question you mentioned strong sell-through of fashion products during the third quarter.

You didn't comment on classic sell-through.

Can you offer some comments there?

And I'm curious if you're seeing compressed sell-through season for the classics that makes the 2Q sell-through commentary less relevant?

Jim, relative to the margin, the difference there is the quarter we just completed was a big quarter for Germany and the conversion had a significant impact, whereas the subsequent quarter, it's not as big a quarter for Germany.

It doesn't have the same impact.

As far as classic goes, it's still early.

We know from patterns of past years that the classic business, especially as we've diversified the product offering.

What we define as classic now versus a few years ago is a very, very broad assortment of product including derivatives.

So we are seeing great sell-through on classic derivatives right now.

Those classic derivatives, by the way, feature many waterproof products which, I think it's raining on the East Coast, and we just happen to run some e-mails and media on our waterproof classic derivatives today.

So the main season for core classic is now probably later than it used to be when that's all we had.

So people are satiating their need for classic with a variety of other classics, and we expect that as the holidays get closer, the core classic will kick in as it typically has done, along with slippers, sort of the tail end in late Q3 and -- or rather late Q2 and Q3.

Mitch Kummetz with Robert Baird.

Yes.

Thanks.

A couple questions.

Tom, on the Q3 guidance, just remind us what your assumption is around reorders and cancellations relative to last year?

And then, I'm not -- I'm still I guess -- I'm not sure I'm clear on the comp for Q3.

I thought you said in your prepared remarks kind of flat to down slightly for the year on store comp.

What is it for Q3 specifically?

And then, help me get to the Q4 guidance?

Because you're talking about $0.15 of earnings, in that quarter it seems like the earnings for the last few years have kind of gotten worse and worse and worse year-over-year.

And now you're expecting that to bounce back pretty nicely, so help me understand how you get there?

Thank you.

On the fourth quarter, we've got significant growth from HOKA, significant growth from Teva and Sanuk, obviously, some more growth from UGG, as well.

We'll have more stores.

We have some good gross margins, and then we are continuing to start to get -- are starting to get more leverage, reach an inflection point on some of our overheads in our Direct-to-Consumer business.

So that helps swing the needle from a loss quarter to an earnings quarter.

So that's the answer on that.

What was the first question on the Q -- was it Q3?

Yes.

On Q3, just remind us what you're assumptions are around reorders and cancellations compared to last year, which I know those came in kind of better than normal.

And then, specifically, what your store comp outlook for Q3 is?

On the reorders, and the cancellations, a more normalized view of that.

That's more of a mid- to high-single-digits kind of reorders.

And sort of assuming that at this point in time it could be the same cancellations, whereas a year ago, strong double-digit reorders and very little cancellations.

And the store comp for the year is flat to slightly down, whereas in the third quarter, we expect -- do we have that handy?

In the December quarter?

Q3.

Yes.

So it's just pretty much flat slightly down in that quarter.

With the pickup in Q4.

Right.

With the pickup in Q4.

Danielle McCoy with Wunderlich Securities.

Hi, guys.

Thanks for taking my question.

I guess I was just wondering if you can give us a little bit of color on some of the locations of the pop-up stores, how long you think they'll be open, and when they'll be open?

Thanks.

Yes, Danielle.

Great question.

We see this pop-up, it is a test this year, but we see this as a potential great long-term strategy for our Omni-Channel network.

We opened up a store in Square One Mall just outside of Toronto.

It's a six-month lease, and the way we look at this is it's an opportunity for us to get into underpenetrated markets, locations where we either want to test to see if it's viable for a long-term lease for a store, or to just take advantage of the peak selling season.

It's great because it's a low build-out cost for us.

It's in our core selling season, so we optimize profitability.

And there is a healthy return on those sales over the six-month period.

So it's a test right now.

Initial results in Square One Mall have been very strong, ahead of plan, which is encouraging.

And then, actually just today, we opened up our second pop-up in the US in the Walt Whitman Center on Long Island, which is a lounge-focused store concept, which showcases all the lounge and home products and slippers.

And so we think that this is a great test that will enable us to be much more flexible in the future, expand our footprint in a more cautious way in some of the locations we might want to test.

And we're also doing this internationally, as well.

So the hope is that we learn from this.

There's a successful model here that we continue to work on and we use this next fall in a more aggressive manner.

It appears there are no further questions at this time.

I would now like to turn the conference back to management for any additional or closing remarks.

Well, thank you, operator, and thank you all for joining us on the call.

Let me just say that we are confident in our strategy.

We are confident in our execution.

We know this is now pedal to the metal time as we move into our primary selling season.

We're not taking anything for granted.

And we are certainly not letting any assumptions get in the way of our execution and our performance.

We're driving to every opportunity that we see in the market around the world.

So I look forward to talking to you on the next call, and really appreciate your participation today.

Thank you.

This now concludes the presentation.

Thank you for your participation.