Deckers Outdoor Corp (DECK) 2017 Q4 法說會逐字稿

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

Welcome to the Deckers Brands Fourth Quarter and Fiscal 2017 Earnings Conference Call.

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

I will now turn the call over to Mr. Steve Fasching, Vice President, Strategy and Investor Relations.

Thank you, sir.

You may now begin.

Thank you, and welcome, everyone, joining us today.

On the call is Dave Powers, President and Chief Executive Officer; and Tom George, Chief Financial Officer.

Before we begin, I would 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 securities laws which are subject to considerable risks and uncertainties.

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 made on this call today, other than the statements of historical fact, are forward-looking statements and include statements regarding our anticipated financial performance, including, but not limited to, our projected revenue, margins, expenses, earnings per share and operating profit improvement as well as statements regarding our cost savings and restructuring plans, strategies for our product and brands and our review of strategic alternatives.

Forward-looking statements made on this call represent the company's current expectations and are based on currently available information.

Forward-looking statements involve numerous risks and uncertainties that may cause actual results to differ materially from any results predicted, assumed or implied by forward-looking statements.

The company has explained some of these risks and uncertainties in its SEC filings, including in the Risk Factors section of its annual report on Form 10-K.

Except as required by law or the listing rules of the New York Stock Exchange, the company expressly disclaims any intent or obligation to update any forward-looking statements, whether to conform such statements to actual statements or to changes in its expectations or as a result of the availability of new information.

With that, I'll now turn it over to Dave.

Good afternoon.

Thank you, Steve, and welcome everyone.

Today, we are going to spend the first part of the call reviewing our fourth quarter and full year results.

After that, we will shift our focus forward to how we are driving improvements in profitability.

This will include specifics on the savings plan that we announced last call as well as our financial outlook for fiscal year '18.

Before we discuss our results, I'd like to briefly comment on the process we announced at the end of April to review strategic alternatives.

That process is ongoing, and as you would expect, we are unable to comment until the board completes its review and improves the definitive course of action or otherwise concludes the process.

With that, let me turn to our results.

During the fourth quarter, we executed on our strategic goals and achieve sales and earnings that were ahead of our expectations.

For the quarter, our sales were above the range we provided due to better performance from UGG and HOKA as well as better-than-forecasted DTC sales.

Non-GAAP EPS, excluding restructuring costs and other charges was $0.11.

For the year, sales are $1.79 billion, and non-GAAP EPS was $3.82.

For the quarter, we are pleased with the performance of the UGG brand and the reception to the UGG spring and summer lines.

Sales of women shoes and sandals grew over 20% compared to last year as we made continued progress diversifying and de-seasonalizing the UGG brand.

And as we indicated we would in our last earnings call, we reduced the amount of close-out products sold into the domestic wholesale channel.

At the same time, we continue to drive growth at HOKA.

Sales for the quarter were up 33%, pushing the brand over the key $100 million milestone for the year.

HOKA's new product introductions, like the Arahi and Hupana helped fuel healthy unit and margin growth.

Looking ahead, we are excited about the domestic opportunity to expand distribution as well as internationally, where we are just beginning to scratch the surface of the brand's potential.

Our DTC comp was flat for the quarter.

Once again, we experienced strong demand in our E-Commerce channel offset by declines in our retail store sales.

For the year, our DTC comp increased 2.6%, driven by strong performance from our E-Commerce channel, which benefited significantly from the launch of UGG closet, as well as the close of our underperforming retail stores.

As we enter fiscal 2018, we are in a much stronger position compared with a year ago.

The organizational review we completed has given us a clear path forward for improving profitability.

Inventory levels are healthier at our retailers, and we have transitioned the marketplace to better product and with more quality distribution.

Nevertheless, we expect that the environment will continue to be difficult.

With the sales headwinds facing the majority of the retail industry, we are focused on improving profitability to the 4 strategic priorities I laid out a year ago.

As a reminder, they are: developing compelling product; focusing on digital; optimizing distribution; and implementing cost savings.

First, developing compelling product.

Across our brand portfolio, our teams have elevated their offering and consumers and the trade are responding positively.

HOKA is a perfect example, which won 18 awards in the last year, including Editor's Choice from Women's Health for the Hupana.

With UGG, we've had success incorporating Treadlite and UGG Pure further into the product line.

One example is the Royale Slide, which was introduced this spring and quickly sold out.

For this fall, we continue to innovate and are excited about the launch of our waterproof Classic with Vibram Arctic Grip and several high-profile product collaborations, including our announced collaboration with Phillip Lim.

Second, focusing on digital reach to consumers.

This past year, we had key wins with UGG Closet, which drove significant growth in our E-Commerce business.

And with the launch for our UGG Rewards program, which has now has nearly 0.5 million members, we have great digital momentum, especially in the U.S., where we estimate over 1/3 of our total UGG sales are done online, including UGG.com and online sales with our wholesale partners.

Third, optimizing distribution.

The goal here to transform our account base to align with the changes in consumer shopping behavior.

This year, we closed accounts that did not represent the best of the brand, and we opened new accounts with quality wholesale partners who are committed to showcasing more of our offering and also have strong online businesses.

Finally, implementing a significant cost-savings plan to streamline our organization and improve profitability.

This has been a major focus over the last 12 months, and I'm excited to discuss that plan more in a moment.

But first, Tom is going to cover fourth quarter and fiscal 2017 financials.

Thanks, Dave, and good afternoon, everyone.

Today, I will take you through our fourth quarter and full year results and break out the restructuring and other charges recorded in the quarter.

Please note throughout this discussion, where I refer to non-GAAP financial measures, I am referring to results before taking into account restructuring, impairment and other charges that our management believes are not core to our ongoing operating results.

Also note, our non-GAAP results are not adjusted for constant currency.

A reconciliation between our reported GAAP results and the non-GAAP results can be found in our earnings release that is posted on our website under the investors tab.

Now to our results for the fourth quarter.

Revenue was $369.5 million, which was ahead our projections, primarily due to better performance from UGG and HOKA and better DTC sales.

Gross margin was 43% compared to our non-GAAP result of 42.3% last year.

The year-over-year difference was driven by less domestic promotional activity and continued supply chain improvements, partially offset by foreign exchange headwinds.

Non-GAAP SG&A expense was $153.9 million compared to $154.5 million last year.

Non-GAAP earnings per share was $0.11 for the quarter versus $0.11 last year.

In the fourth quarter, we recorded $35.9 million in restructuring and other charges related to retail closures, impairments and organization changes.

Of the $35.9 million, $9.9 million were noncash charges.

Now to the year.

Revenue was $1.79 billion compared with $1.88 billion last year.

The decrease was driven by a $106.8 million decrease in wholesale and distributor sales, partially offset by a $21.8 million increase in DTC sales.

Gross margin was 46.7% compared to our non-GAAP result of 45.4% last year.

The 130 basis point increase in gross margin was due to improved input cost and continued optimization of our supply chain, partially offset by foreign exchange headwinds.

Non-GAAP SG&A was $669.6 million compared to $656.2 million last year.

Non-GAAP earnings per share was $3.82 compared to $4.50 last year.

The year-over-year decline was driven by lower sales and higher SG&A, partially offset by a 130 basis point increase in gross margin.

The non-GAAP effective tax rate was 23% and better than expected for the year, but slightly higher than last year's non-GAAP rate of 22%.

During the year, we incurred charges totaling $167.5 million related primarily to restructuring and impairments, of which $134.2 million were noncash charges.

At March 31, 2017, our backlog was up 6.6% compared to the same date last year.

Directionally, UGG U.S. backlog was up low single digits, and UGG international was up double digits.

As a reminder, our March 31 backlog only includes orders from wholesalers and distributors for delivery in April through December.

This backlog figure represents about 1/3 of our total revenue and does not include our company DTC sales, all of fourth quarter or any future orders we may book such as at-once orders or closeouts.

I'd now like to hand the call back to Dave who will provide an update on our savings plan and how we see it improving our business long term.

Thanks, Tom.

As I said when I assumed the CEO role 12 months ago, fiscal 2017 would be a transitional period for the company.

With the year now behind us, we are moving forward with the sound plan in place to improve profitability and lay the foundation for future growth.

Last call, we announced $150 million cumulative savings plan before reinvestment that consisted of a combination of SG&A and cost of goods improvements.

We said that these savings would be implemented over the course of the next 2 years with the full benefit being realized in FY '20.

We also said that we'd provide more guidance on how the savings would flow through once we completed the year and finished our pre-book.

With that process now complete, we are pleased to share that $150 million announced cumulative savings will drive a $100 million improvement in operating profit for the fiscal year 2020.

With these savings, along with modest low single-digit revenue growth, we believe we can achieve an operating margin of 13% in fiscal year 2020.

To provide some more perspective on where the savings will come from, COGS improvements will be achieved by: reducing product development cycle; optimizing material yields; consolidating our factory base; and continuing to move production outside of China.

SG&A savings will come from: further retail store consolidations; process improvement efficiencies; and reduced indirect spend.

The process to implement savings is already underway.

For FY '18, we expect net SG&A to be approximately $10 million lower.

However, this understates how quickly we are addressing our cost structure.

On a like-for-like basis, SG&A would be nearly $30 million lower, excluding the reinstatement of performance-based compensation.

In regards to our global retail fleet.

As we look out over next 2 years, we are planning to reduce our global company-owned brick-and-mortar footprint by 30 to 40 stores, which includes both closures and the transfer of existing company stores to partners.

By FY 2020, we are targeting to have an optimized company-owned fleet of approximately 125 stores globally.

I will now turn the call over to Tom to provide guidance for the fiscal year 2018 as well as the first quarter.

Thanks, Dave.

For fiscal year 2018, we expect revenues will be in the range of flat to down 2% compared to 2017 levels.

Included in down 2% sales guidance are the following assumptions: slightly improved promotional environment with less closeout product in the channel; similar weather conditions to last year; DTC comp up low single-digits; domestic wholesale sales down mid-single digits driven by U.S. wholesale account rationalization; international wholesale sales up mid-single digits; in-season reorders netting cancellations; and fewer retail stores which represents lost revenue of approximately $15 million.

The flat sale scenario assumes the following improvements: in-season reorders exceeding cancellations; slightly higher international wholesale business; and a colder start to the fall, winter selling season.

By brand, we expect UGG revenue to be in the range of down 3% to down 1%; HOKA to grow approximately 20% to 25%; Teva, up 1% to 5%; Sanuk, down 10% to down 5%; and Koolaburra to be approximately $13 million to $16 million.

With respect to gross margins, we expect full year gross margin to be approximately 47.5%.

SG&A as a percentage of sales is projected to be approximately 37%.

For the full year, non-GAAP earnings per share is expected to be in the range of $3.95 to $4.15 on a share count of 32.7 million and an effective tax rate of 27%.

As a reminder, this excludes any charges that may occur from additional store closures and other restructuring charges.

Capital expenditures for the fiscal year, expected to be $45 million, and we expect to generate free cash flow of approximately $150 million.

For the first quarter, we expect revenue to be up low single digits compared with the same period a year ago, and we expect the non-GAAP diluted loss per share of approximately $1.70 to $1.65 compared to a diluted loss per share of $1.80 last year.

With respect to the 6.6% increase in our backlog and March 31 and how that ties to our full year outlook for revenue to be flat to down, there are a few factors to keep in mind.

First backlog is simply recorded at a point in time and can't be compared with accuracy from year to year.

For example, this shows the main driver of our backlog growth was due to changes we have made with our EMEA wholesale partners and the way that they pre-book.

Traditionally, our EMEA wholesale partners have booked later than the U.S. This year, we really pushed them to place orders earlier so that we can better manage our inventory and get commitments upfront.

Second, between reorders in December and our fourth quarter business, there's still a meaningful amount of wholesale sales that we currently don't have orders for.

While inventory in the channel is clearer than was a year ago, based on how the past 2 holiday seasons have played out, combined with the ongoing traffic challenges across brick-and-mortar retail, we believe that it's prudent to be conservative when it comes to our assumptions until we have more visibility into the consumer demand.

And third, our full year forecast, obviously, includes our direct-to-consumer business, which is not captured in backlog and represented roughly 35% of our fiscal year '17 sales.

And as I said, it is important to remember that we are facing a headwind in fiscal year '18 from the stores we closed in fiscal '17, which, in total, account for approximately $15 million.

I will now hand the call back to Dave for his final remarks.

Thanks, Tom.

We are confident in our ability to execute our plan to improve profitability.

We have made significant progress in the last year, and I want to thank our employees for their hard work, tireless dedication and willingness to embrace change to get us to this point.

I look forward to continuing to successfully execute our strategy as we drive towards a 13% operating margin.

As a reminder, we will not be commenting on our strategic alternatives process.

So I ask that you limit your questions to our financial results announced today.

Thank you in advance for your cooperation.

With that, we will open up the call for questions.

Operator?

(Operator Instructions) The first question is from Jonathan Komp of Robert W. Baird.

A couple of questions on the longer-term outlook.

First, maybe just asking on the 2020 view of reaching $2 billion of sales with next year projected flat to down slightly.

Obviously, implies better growth the following 2 years.

So I just wanted to maybe parse out what you're seeing in terms of initiatives to help restart the top line growth rate after this coming year?

Yes, Sure.

This is Dave.

So what I would say the focus for us around driving growth and getting to that $2 billion is really around the HOKA and UGG brands.

For UGG, we're really focused on driving growth through the men's business, spring and summer businesses in women's and then really from a general perspective it's E-Commerce globally, Europe driven by opportunity that exists still in Germany and then in China.

And then in addition to that, in the HOKA brand, we see significant opportunity for growth in that brand.

Just after passing $100 million, mark, we're going to relocate some resources to drive to growth in that brand, investing and marketing to drive awareness and investing in capabilities in our international markets to activate the opportunity there as well.

Okay.

And any thoughts on the -- I think it's implied kind of a mid-single-digit top line growth after this year.

Any thoughts on how quickly you could -- it sounds like the cost-savings side is really developing and materializing pretty quickly.

But any thoughts on how quickly the revenue could get to those levels?

Yes.

Well, I think we're conservative at this point based off the challenges in the marketplace that we see in the short term.

So we're applying that, and definitely for FY '18 and still into FY '19 and '20.

We're focused on driving growth higher than that, but at this point, from the outlook for today, again, some of the headwinds of store closures, we think that's the right number.

Okay, great.

And then maybe one more, just on the longer-term targets, the difference in the growth versus the net margin improvement.

Could you just maybe walk-through kind of what the difference is there, what you're investing in, or what the offsets versus the growth savings might be?

Yes.

We still see a gross margin expansion with all the supply chain initiatives we've been talking about in the factory, in the movements in the factory as well as the other initiatives we've talked about.

But we see a lot of leverage on the SG&A line.

We feel really good where we stand from a cost savings initiative on the SG&A side.

In fact, we've got enough levers in place and enough visibility on the operating expense side, including -- and we're talking about further reduction in our retail historically.

When you consider all that together, we feel, even if we get flat revenue growth through 2020, we've got enough levers in place that we can still drive $100 million of operating profit improvement and an operating margin at least 13%.

And the next question is from Camilo Lyon of Canaccord Genuity.

Wait.

So Tom, on just your last comment there.

So the $100 million in the profitability improvement and the 13% EBITDA margin you're expecting is assuming a flat sales growth number, a flat number?

So I mean, (inaudible) that increase?

The long-term targets we talked about, we feel we've got the right opportunities in place to grow the top line as well, and we'll have to do some reinvesting to do that, and we'll generate $100 million of operating profit and a greater -- a 13% operating margin.

What I wanted to reinforce was the fact we have enough SG&A savings levers in place that, if we're not getting traction in a marketplace, we'll slow down the reinvestment and we'll still get $100 million of operating profit improvement and still at least a 13% operating margin.

Yes.

So Camilo, just to be clear on that.

So Dave talked about 2020 with low single-digit growth revenue targets.

That's what we're talking about, the $2 billion.

To Tom's point, we can still achieve the targeted 13% even if we don't get that low single-digit revenue growth, that there's enough variability in the expenses that we can cut back to still achieve that 13% operating profit target.

Correct.

Got it.

Got it.

Understood.

Thanks for that clarity.

So I just want to ask on the cadence of the expense savings.

It sounds like -- so you're doing -- you're going to see about $10 million this year.

How do we think about that incremental expense savings of realization in 8 -- in 9 -- fiscal '19 as you get to '20?

Yes.

So as you think about the $100 million profit improvement, basically, one of the headwinds, as Dave mentioned, that we're facing in '18 is an assumption of a performance-based compensation payout.

So that's netting some of that down in '18.

Once you get to '19, the way we have it modeled in, roughly, as you get a more like-for-like.

So the savings or profit improvement that you'll see will be greater because you won't now have that headwind of the performance-based compensation.

So similar types of improvements for '19 and then into '20, and that's what gets you your $100 million.

Got it.

Great.

And then my final question, Dave, if you could just give some thoughts on how you think about -- or how you have thought about your wholesale rationalization domestically.

And I see that as constant stuff this past seasons in which there was a lot of some of your -- but there are a few wholesale partners in which pulled the promotional trigger sooner than they should and disrupted the pricing in the market.

How did you address that?

And what should that look like as we get into fall season?

Yes, good question.

So we've made pretty significant progress on transforming the North American marketplace, and that's a combination of a few things: One is cleaning up the number of accounts that we have in the North American business.

We've talked about that over time.

So we've closed quite a few of accounts, roughly about 400 accounts.

In the UGG brand, some of those, sizable.

And we have addressed some of the challenges that we had last year with MAP violation and discounting.

And as you know, we incubated some new opportunities the last fall as well with Macy's and then also Amazon.

So we've cleaned up some of the smaller disruptive accounts.

We've strengthened the relationship with our top key accounts.

And then we've opened new accounts that we think represent the brand in a positive way and also allow us to do more E-Commerce business across the board in those channels.

So still work to go, but we still feel very confident in the progress we've made and the repositioning of the brand.

The other thing to keep in mind is we will be going into this quarter, the fall quarter, in a better place from an inventory perspective, less closed-out inventory in the channel and the headwind of the Classic 1 hangover is behind us.

And just on that final point, did you -- do you expect more account closures?

Or is -- or where you stand out is where you're comfortable at?

And did the onboarding of Macy's in the bigger way and Amazon, was that a direct offset to the accounts you closed?

Or did you come out at a deficit or surplus?

Yes.

So we will continue to evaluate the fleet.

We have new management in place in North America sales and a strategic account focus there.

But over time, we will be closing more smaller accounts.

I think that's the right thing to do for the brand, and just how we control the marketplace and presentation of the brand.

And overall, we will be slightly down.

So while we are opening new accounts, offsetting some of those closures and some of the conservative nature of our key accounts, nets us in a situation that's slightly down from North America wholesale.

The next question is from Omar Saad of Evercore.

I wanted to see if we could dive in a little bit deeper on the solid (inaudible) side of UGG in the quarter.

Maybe we could get a better understanding, was it driven by new styles, channels, the weather?

Any insight there would be helpful, I think, as we try to understand the evolution of that brand and how it's changed throughout the year.

For the fourth quarter?

(inaudible)

Yes, so what we're seeing in UGG -- yes, okay.

As you know, we've been focused on diversifying the UGG brand and building our spring and summer business for quite some time.

And we actually have had a pretty successful quarter in 2 categories: sneakers and in sandals.

So we had a few sneakers that were performing very strong for us, sold through at a high rate and drove the increase of 20%.

And then sandals, across the board, but the introduction of the Royale Slide into our DTC channel was a bestseller as well.

So starting to get traction in these new categories, and I think it's driven by the fact that it's distinct ownable product that has the DNA of the brand and has uniqueness in the marketplace.

And also, you're having more belief from our partners of showcasing that product in the time frame as well.

I don't know, Tom, if you want to add anything on the total...

I was going to say, our UGG business internationally was stronger than expected.

Our Direct-to-Consumer business was stronger than expected, really led by our domestic E-Commerce business did very well.

And then the other one, this is not UGG, but HOKA business was above expectation for that quarter.

The next question is from Scott Krasik of Buckingham Research.

A bunch of question, I will try to make them fast.

For the year, what were Classics as a percentage of total UGG sales?

And then what were specialty Classics as a percentage of total UGG sales?

In terms of women's, Classics were still about -- they ended up still about 25% of the women's Classics -- core Classics were 25% and specialty Classics still ended up about 25% of the women's business.

So consistent with what we (inaudible)

And we think that's a good steady rate going forward.

We balanced out that business and core Classic's at 25%, we think is a healthy rate going forward.

No, that's good.

And just as you look at the backlog as of right now, is that sort of how the backlog is booked as well?

Or is there any -- are there any outliers within the backlog?

No, pretty consistent.

Yes, I think the cleanup both from a Classics perspective in the marketplace and account rationalization, the focus on innovation and styles like the waterproof Classic, the weather product and some of the specialty Classics have really netted us out in a very similar shape for the fall, which I think is the right thing to do.

Good.

Okay.

And then what's your DTC comp assumed for the full year?

And is there any quarter where you expect it to be an outlier?

We expect the DTC comp to be up low single digits on the quarter…

Yes, quarter -- for Q1, we've said…

For Q1 up low single-digits.

Yes, right.

Yes.

Yes, which is equivalent to what we delivered for the year.

So our full year DTC comps were low single-digit positive.

Okay.

No, that's helpful.

And then just sort of when you look at the 2020 plan, what percentage of your UGG sales do you expect to come from wholesale?

And what percentage do you expect to come from DTC?

Yes.

We haven't given that level of visibility yet.

DTC will be driven by growth in E-Commerce, and we're really heavily investing and continuing to bolster that business globally.

We'll have some store offsets against that, but E-Commerce will be a driver.

And on an international level, it will be driven, as I said, from really Germany and the Europe market, and then upside in China.

But we haven't given out the mix yet of full wholesale, but it should be definitely more a little more in DTC.

But it will be held back a little bit as we reduce our store count.

Okay.

And just lastly, I mean, you guys should generate a ton of cash based on this plan.

I'm just wondering how and when you elect to deploy the cash?

Good question.

That is part of the board's current strategic evaluation, so we really can't comment on that right now.

The next question is from Randy Konik of Jefferies.

So Dave, I just wanted to follow-up on the wholesale rationalization.

You gave us perspective on, I think, you said closed 400 accounts.

Is there any more granularity you can give us on how many -- because you said there's more to come?

Just any more granularity on how much more will come?

And then is it safe to assume, given where the backlog trends are and given the account closures that have occurred already, it almost seems as if the -- you've reached finally a nice -- or at least an inflection stabilization in the core account base.

Is that fair?

Or is that on the way?

How do I think about that?

That's my first questions.

Yes, I'll answer your second one first.

I think that we have landed on a nice stabilization of core accounts that are driving the majority of the volume.

So we use the term we want to win with the champions -- the channel champions, and we think that with our current key accounts, and some of the new ones we've incubated, we believe these are the players that are going to be around for a while.

They have strong E-Commerce businesses that we can continue to develop and they're going to represent the brand in a positive way.

And that includes some of the newer accounts we're incubating such as Footaction and [602] in North America.

Beyond that, we'll continue to look at cleaning up the distribution.

We want to elevate the presence of our brand year-round.

We want to showcase the full breadth of the brand.

We don't need more distribution for core Classics.

We have that covered, and the customer knows where to find that.

So I think you'll see another couple of hundred, few hundred over the next few years of account cleanup in North America, but we haven't given the real detail and mapped that out exactly yet.

Got it.

And then can I ask about the international?

Obviously, it seems like the opportunity there has been, I guess, in fits and starts there.

So just have you got -- can you give us some perspective on how you think about the potential sizing of the international opportunity?

What things you need to take on to get that geographic part of the market to accelerate?

And beyond, I think you said Germany and the U.K., what are the -- and I think China you said, what other areas are interesting?

And what areas are just not appealing and why?

Yes.

So we've been working hard over the last year -- couple of years, but really in the last year, to kind of reset the game plan for Europe and also in China.

We have new leadership in our European business for the UGG brand that came on the last 6 months.

We have spent a lot of time cultivating the new markets there of Germany, and looking for new opportunities beyond existing accounts and beyond Classic business.

And I feel like we're in a pretty good place in Europe.

The brand continues to be strong.

The order book looks good for the fall season.

And I think that people are realizing there is more opportunity for the UGG brand.

So good leadership in place, good account segmentation strategy in place.

Product is right for the market and also the strategic partnerships with the key people over there are in place.

So I think we're in a good position for Europe.

On the Asia Pacific side, the game is really all about China.

And so we have obviously proved success with the brand with our owned store model and E-Commerce model.

The partner program is off to a strong start.

And we realize that through the conversations with our partner and the opportunity in the brand in that market, there is bigger upside for growth over time.

So we're going to invest in the brand in that market.

We've shifted some marketing dollars for this year heading into fall '17.

We are in the process of aligning with a key celebrity in that market to really drive brand heat and brand awareness.

And with the continued partnership with our wholesale partners opening doors for the UGG brand, we see that as a significant opportunity.

And can I just ask one last one last one here?

On the good work you're doing around cleaning up the distribution on the U.S. market, that's going to create more UGG, I guess, scarcity value.

And then give you more ability to kind of police pricing, et cetera.

So how should we be thinking about kind of AUR trend and pricing architecture in the UGG-based business, or the UGG business over the next couple of years?

Because it seems like there's an opportunity to kind of get more firmer pricing, less markdowns, less closeouts on a more -- not just on a seasonal basis, but on a more sustainable structural basis that should give this business model more kind of long-term higher structural margins.

So just want to get your thoughts on that, and then I'm done.

Yes, I think you're thinking about it the right way.

We are invested in the long-term health of the UGG brand.

We think a little bit of scarcity across some of the core Classics business over time is the right thing to do.

And we're focused on improving ASPs and a tighter control on inventory in the marketplace.

So you'll see this fall that we're going to have less closeouts in the market, that's the plan.

More full priced business and tighter control of the inventory through the process.

So you've really summed up the goal long term.

The next question is from Jim Duffy of Stifel.

Couple of questions for me.

First thanks for the detail identifying the components of the savings opportunity in both the cost-of-goods and SG&A buckets.

Tom, which of those do you expect come earlier the window?

And which do you see materializing later in that window through fiscal '20?

They'll both start coming, not only in '18, but '19 and '20.

So they'll occur in all 3 years.

We see the SG&A opportunity is a very large and significant not only this year, but also in '19 and '20.

And I think, Jim, we're starting to see the impacts already of the COGS savings.

And then the SG&A savings will be heavily driven by retail store closures over the next 2 years.

So it's just a matter of timing and when we get those stores closed.

As well as the other indirect spend savings we see and the other organization process improvement efficiencies we see.

Okay.

And then in terms of the evaluation of the retail fleet, is it just a matter of an MPV calculation or IRR calculation about getting out of those leases?

Well, the assessment really comes down to: a, the strategic locations, does it serve the brand long-term.

And then you couple that with the financial performance -- current financial performance, and then based on outlook for that location, what kind of returns are we getting on there.

We have our threshold of 20% returns on profit for 4-wall.

But then when you look at that over time, we think that we need to have a more balanced fleet between full price and outlet stores globally.

Full price to serve the consumer and the brand diversification efforts, and then the outlet stores in the market to make sure we keep a clean marketplace and drive profit.

Okay, great.

And then I know implementation of product segmentation strategies go hand-in-hand with your agenda to be more strategic on distribution.

In this fiscal year, will we see evidence in the marketplace of those product segmentation strategies?

Or is that delayed into the next fiscal year?

Yes, no, good question, because that's really important for the brand long-term.

You're going to see initial results of segmentation.

The challenge with that is we are retrofitting, so to speak, the product line for fall '17.

But when you get to spring '18 and really fall '18, you will see a much more robust segmentation strategy with product designed specifically for channel and tier.

The next question is from Jay Sole from Morgan Stanley.

This is Joseph Wyatt on for Jay.

Just a few questions here.

Can you talk about what some of the cadence of store closures we might see over the course of the year?

And then secondly, on the cost buckets between gross margin and SG&A, is it possible for you to sort of rank the importance of each of the elements that you listed?

In terms of the cadence, we're still evaluating that.

What typically goes into play is if you can't get them done sooner in the year, then you go ahead and take advantage of peak and get a big return on the store.

And you typically have them close by the end of the fiscal year.

And in terms of what may be closed this year versus next year, it could -- to be determined, it is going to be a function of, in some cases, what kind of cash payment we need to make to get out of the store.

But for this year, for fiscal year and '18, the assumption we're making is that they're going to be closed by the -- towards the end of the year.

So therefore, there's really not a big impact on revenues for the year.

Correct.

Including transfers to our partners in China.

All right.

And then my second question.

Could you rank the -- like the importance of the buckets of COGS saving?

Sorry, the components driving the cost savings?

Yes.

I'd say the biggest thing there is consolidating the factory base, moving production outside of China, the material yields, some of the other sourcing negotiations and things that we're doing.

Yes.

And then ongoing over time, the go-to-market process and development process.

So SKU rationalization, SKU optimization and then just improving our product development and cycle times, we'll have a payback on that too.

The next question is from Rafe Jadrosich from Bank of America Merrill Lynch.

Just in terms of the $50 million of reinvestment, where will that be focused?

Yes, so there's a few areas.

First and foremost, the reinvestment will be focused on our growth drivers.

So in the UGG brand, again, around the areas of men's in spring and summer, and then creating awareness in the HOKA brand.

So that's a marketing reinvestment in the HOKA brand.

In addition to that, as Steve mentioned, putting back the performance comp, performance-based comp into the mix.

And then you have a level of sales-related variable expenses to the growth over time as well.

Those 3 buckets.

And then just can you -- I might have missed this, how many stores did you finish the year with?

160?

160.

160.

And then we said by 2020, we think 125 globally owned stores is the right number for the size of the business and our ability to showcase the brand.

The next question is from Bob Drbul from Guggenheim.

I guess the first question is, on the backlog numbers that you talked about, does that include the account closures that you had?

Or did you exclude it year-over-year?

Y

It's total.

It's total.

So it includes the account closures that we've had.

Correct.

Okay.

Okay.

And then can you talk a little bit on an update on the men's business?

How it's performing the outlook, as well as what you've learned with the Koolaburra with Kohl's?

Yes.

So men's, we're really excited about the momentum we have in men's.

We've started off last fall with continued momentum in our new male styles.

And that outlook for that product going into fall '17 is very strong.

In fact, it's the new male has become the #1 style in the men's business, which is a first for us.

It's usually a slipper.

So it's indicative of the fact that we're getting a new customer into the brand, a younger consumer in the brand and diversified distribution for the men's products.

So we're very excited about the progress in men's, across the board, but particularly in that new male franchise that we think we can continue to leverage.

Koolaburra, again, a small business, but started off well this past year with our introduction and launch primarily at Kohl's.

We're going to continue that business to grow in a handful of accounts.

We're not looking to sell this at a broad distribution to independents.

It's really around a key account focus with a lean team.

And we think this year we can double the business from last year and continue to incubate that business over time.

And if I could just follow-up on the 400 accounts.

Is there a dollar number of sales that was attributed to those accounts?

Or how much did that influence the backlog that isn't in your backlog this year that you guys did do business with last year?

Yes, generally speaking, large numbers of doors, small amount of business, except for maybe a handful of a little bit more sizable ones.

The next question is from Corinna Van der Ghinst of Citi.

Just some quick follow-up questions for me.

On the reinvestment that you guys are claiming, is that incorporating any additional marketing expense?

Or can you talk about -- a little bit about what you guys are focusing the marketing on, and also as a percent of sales versus last year maybe?

Yes, as a percentage of sales over time, we see it roughly about the same, maybe a little bit of an increase.

But the -- what we've done over the last year through all this restructuring work is we've scrubbed the marketing spend globally, and we're reallocating to 3 main areas.

One is digital, globally across all brands.

One is in UGG, particularly in the areas of spring and summer in men's and China, so incremental spend is focused on there, reallocated there.

And then really on driving awareness in the HOKA brand.

And so from a percentage increase over last year by brand, HOKA is going to have the most significant increase in marketing spend to drive awareness.

So we can start to see more success in the run specialty channel and beyond.

And also in Europe, where we have a pretty strong business that needs more awareness help in the country of Germany and the U.K. and then incubating China as well.

So obviously, that brand has momentum.

When the customer hears about it and when they try it, they're hooked.

But we just need to focus on growing awareness to optimize the size of that brand.

Okay, that's helpful.

And then just a follow-up on Macy's.

I think you guys have said you're expanding to around 100 doors.

Is that number going up more than you guys had previously planned?

And can you talk a little bit about the expansion that you guys are doing there?

Is it -- are you going to do more shop-in-shops than you've done in the first season?

And then just kind of what those square footage expansions will look like?

Yes.

So we started last fall with the initial launch in Macy's Herald Square, which was very successful and, in fact, they gave us more space for the months of November and December.

And we also did a 35-store test with a broad demographic of store locations.

We've now parlayed that into continuing to support the Herald Square and shop-in-shops that we established.

And then we're going to 200 doors.

I believe we started that for spring and that will continue into fall.

And right now, we're comfortable with that amount.

We want optimize the business in those stores and make sure we have a robust presentation across all genders and all seasons.

That's going well so far, so we're optimistic about the opportunity going forward into this fall, both in stores and online.

Okay.

Great.

And then just one final follow up on just your inventory management plans going forward.

You guys (inaudible) at DSW last fall, and you've utilized the UGG Closet function a bit more.

Can you talk about how that strategy is being planned for this fall versus last year?

And how you're kind of thinking about that longer term as well?

Yes.

So couple of things.

One is we spoke on the last call about selling less closeouts into the channel this past Q4, so we achieved that goal in North America.

So there's less closeouts in the channel to begin with.

We did utilize UGG Closet to help flush some of that inventory, which, from my perspective, is a very healthy way to do it because you're getting higher margin per style.

You're getting the customer data as you make that sale.

And then you are selling the inventory directly to the consumer versus to an account who may hold onto that and then sell it later in fall, which will disrupt your full-price business.

So that's going to continue going forward.

We'll utilize UGG Closet for that as a way to optimize the margin of excess inventory.

Generally speaking, we are focused on having fewer closeouts across the board over time.

And then we will continue to utilize full -- or sorry, key accounts for some of the closeout business such as DSW and Nordstrom Rack, et cetera.

Our final question comes from Erinn Murphy of Piper Jaffray.

This is Eric on for Erinn.

First one I guess for me is how you are -- when you close stores, how are you thinking about balancing the recapture between your own E-Commerce website at those units, and 3P replenishment-type websites, Amazon, Zalandos, et cetera, as you -- as those units shift, especially on the 50% of the business that's Classics and specialty Classics?

Yes.

So it's hard to capture 100% of that business obviously.

And so we're planning on capturing a small percentage of that business from the store volume.

The other challenge that we have to face when we do close those stores, is those stores are driving business to our online channel through our infinite UGG program and Click and Collect.

So we're not going to capture 100% of those store closure business, that's why we estimated the $15 million headwind this year.

But you will see a little bit of pickup, but it's certainly not to the rate where you can capture that business going forward.

Thank you.

I would now like to turn the conference back over to Mr. Powers for his closing remarks.

Well, thanks, everybody.

With the fiscal year 2017 now closed and fiscal year 2018 beginning, I would like to reiterate our focus on improving profitability and strengthening our brands for future growth.

As we look forward, the entire company is intensely focused on achieving our 13% operating margin target for 2020.

We'll do this by driving growth in our UGG and HOKA brands, optimizing profitability in our Teva and Sanuk brands, and executing on the cost savings and gross margin improvements over the immediate term.

While the marketplace may continue to have its challenges, we're confident in our ability to control our cost structure in line with the changes in our business patterns, while continuing to optimize our sales channels globally.

In closing, I would like to thank all of our stakeholders for their support and employees for their continued focus and passion for the business.

Thank you.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference.

You may disconnect your lines at this time, and thank you for your participation.