Deckers Outdoor Corp. Q4 2008 Earnings Call Transcript

| About: Deckers Outdoor (DECK)

Deckers Outdoor Corp. (NASDAQ:DECK)

Q4 2008 Earnings Call

February 26, 2009 4:30 pm ET


Angel Martinez – President, Chief Executive Officer, Director

Thomas Hillebrandt – Chief Financial Officer

Zohar Ziv – Chief Operating Officer


Jeff Klinefelter – Piper Jaffray

Jeff Mintz – Wedbush Morgan Securities

Todd Slater – Lazard Capital Markets

Chris Svezia – Susquehanna Financial Group

Mitch Kummetz – Robert W. Baird & Co.

Jim Duffy – Thomas Weisel Partners

Howard Tubin – RBC Capital Markets


Welcome to the Deckers Outdoor Corporation fourth quarter and fiscal 2008 year end earnings conference call. (Operator Instructions) I would like to remind everyone this conference is being recorded.

Before we begin, I would also like to remind everyone of the company’s Safe Harbor language. Please note that some of the information provided in this call will be forward-looking statements within the meaning of the securities laws. These statements concern Deckers plans, expectations, and objectives for future operations.

The company cautions you that a number of risks and uncertainties, some of which may be beyond its control, could cause Deckers actual results to differ materially from those described on this call. Deckers has explained some of these risks and uncertainties in its earnings press release and in our SEC filings included in the risk factor section of its annual report on Form 10-K and its other documentations filed with the SEC.

Among these risks is the fact that the company’s sales are highly sensitive to consumer preference, to general economic conditions, to the weather and to the choice of its customers to carry and promote its products. Deckers intends that all of its forward-looking statements and this call will be protected by the Safe Harbor provisions of the Securities Exchange Act of 1934, as amended, and the Securities Act of 1933, as amended. Deckers is not obligated to update its forward-looking statements to reflect the impact of future events.

At this time, it’s my pleasure to turn the conference over to President, Chairman and Chief Executive Officer, Angel Martinez. Please go ahead, sir.

Angel Martinez

With me on the call today are Tom Hillebrandt our Chief Financial Officer, and Zohar Ziv our Chief Operating Officer. Our record fourth quarter results exceeded our guidance and represented a very strong finish to another record year for the company.

While we’ve enjoyed several consecutive years of out performance, 2008 was particularly rewarding, as the past 12 months have proved to be the most challenging economic conditions in some time, and that goes without saying.

We are obviously very pleased with our record results. However, our sights remain firmly set on the future. Before we get into our outlook and strategy for 2009, I want to quickly review some of the key highlights from both the fourth quarter and the full year.

Beginning with Q4, total sales increased 56.3% to $303.5 million above our original guidance for sales to increase 52%. UGG sales increased 62% to $288 million. Diluted EPS, excluding the non-cash charges detailed in today’s earnings release, increased 50.6% to $4.05 above our original guidance for EPS to increase by 44%.

Now, to the full year. From a financial perspective, sales increased 53.6% to a record $689.4 million. UGG sales rose 67.5% to $582 million and set revenue records for all four quarters this past year. Simple sales increased 27.4% to $17.2 million. Domestic sales were $581.5 million, an increase of 50.4%. International sales rose 73.1% to $107.9 million. Retail same store sales rose 32.7%.

Diluted EPS, excluding the non-cash charges, increased 43.7% to a record $7.27 and we ended the year with $194.8 million or nearly $15 per share in cash, cash equivalents and short-term investments and no debts. Strategically, we acquired Tsubo and formed a joint venture in China. We opened five concept stores, including three international locations and one outlet store, and we introduced the first ever shop-in-shop at key accounts this past fall, including 40 in the U.S. and 29 internationally.

Operationally, we implemented an automated pick module for our recently expanded distribution center. We strengthened our executive leadership team by promoting Zohar Ziv to the newly created position of Chief Operating Officer. We hired Tom Hillebrandt as Chief Financial Officer, and we also added a Senior VP of Supply Chain, a Vice President of China and Source and we greatly enhanced our HR functions with the addition of Raphael Montgomery as VP of HR.

Tom will now review the financials in more detail and then outline our guidance. After that I’ll return to discuss our strategy for 2009 and beyond.

Thomas Hillebrandt

For the fourth quarter, including sales from the wholesale division, as well as our retail and e-commerce divisions, net sales of UGG increased 62% to $288 million compared to $177.7 million in the same period of 2007.

Net sales of Teva products decreased 11.1% to $12.4 million versus $13.9 million for the fourth quarter of last year. And Simple net sales declined 12.3% to $2.3 million compared to $2.6 million in the corresponding period of 2007. Sales for both Teva and Simple were negatively impacted by the macroeconomic conditions.

For the fourth quarter, domestic sales, which are included in the brands sales numbers that I just gave you, increased 59.5% to $283.4 million compared to $177.7 million in the fourth quarter of 2007, while the international sales increased 21.3% to $20.1 million compared to $16.5 million a year ago. As a percentage of sales, international sales were 6.6% in Q4 of 2008 compared to 8.5% last year.

Our fourth quarter gross margin was 45.3% compared to last year’s fourth quarter of 48.2%. The year-over-year decline in our gross margin was primarily attributable to increased factory costs associated with our UGG brand, as well as an increase in closeout sales and inventory write-downs for Teva and Simple brands. Total SG&A expense for the fourth quarter was $52.8 million or 17.4% of net sales compared to $36.7 million or 18.9% of net sales a year ago.

The planned increased in SG&A in absolute dollars resulted primarily from an increase in personnel costs due to higher headcount and long-term incentive plan expense, additional distribution center costs related to our expansion in December 2007 and increased shipping volumes and higher sales in marketing variable cost related to the increase in sales, as well as six new retail stores that were not open during the full fourth quarter of 2007.

Our levels of cash, cash equivalents and short-term investments have been sufficient to self-finance the buildup of inventory required to meet increased sales, however, a significant shift in the mix of our cash and cash equivalents and investment balances in 2008 versus 2007 to safer more liquid and lower yielding investments, as well as lower market interest rates resulted in a fourth quarter decrease in interest income to approximately $0.7 million as compared to last year’s fourth quarter interest income of $1.4 million.

As stated in our earnings release, as part of our annual goodwill and indefinite lived asset impairment testing, the accounting valuations show that goodwill for Teva and Tsubo and the Teva trademarks were significantly below the carrying value of these intangibles on our balance sheet.

And, therefore, we recorded a non-cash pre-tax charge in the fourth quarter of $20.9 million reflecting the write-down of $15.4 million for all of the Teva and Tsubo goodwill, which was primarily caused by the significant decrease in the company’s market capitalization as the stock market as a whole has declined, as well as reduced forecast for the Teva brand.

In addition, the company recorded an impairment loss of $5.5 million on the Teva brand trademarks. This resulted primarily from the reduced forecast for the Teva brand. On an after tax basis, the impairment charge was $13 million or $0.99 per diluted share. Excluding the impact of the impairment charge, net income for the fourth quarter was $53.5 million or $4.05 per diluted share compared to $35.4 million or $2.69 per diluted share in the fourth quarter of last year.

For the full year, including sales from the wholesale division, as well as our retail and e-commerce divisions, net sales of UGG increased 67.5% to $582 million compared to $347.6 million in 2007. Net sales of Teva products decreased 1.6% to $86.5 million versus $87.9 million, and Simple net sales increased 27.4% to $17.2 million compared to $13.5 million last year.

Included in the brand sales numbers I just gave, domestic sales increased 50.4% to $581.5 million compared to $386.6 million in 2007, while international sales increased 73.1% to $107.9 million compared to $62.3 million a year ago. As a percentage of total sales, international sales represented 15.7% in 2008 versus 13.9% of total sales in 2007.

Our gross margin for the full year was 44.3% compared to 46.2% for the full year of 2007. Year-over-year decline was primarily driven by the increased factory cost associated with our UGG brand, a higher percentage of international sales, which carried lower gross margin, as well as increased inventory write-offs for Teva and Simple.

Total SG&A expense for 2008 was $152.6 million or 22.1% of net sales, compared to $101.9 million or 22.7% of net sales a year ago.

The planned increase in SG&A in absolute dollars resulted primarily from an increase in personnel costs, including additional stock compensation primarily related to our long-term incentive plan, additional distribution center costs related to our expansion in December 2007, and increased shipping volumes and higher sales and marketing variable costs related to the increase in sales, as well as six new retail stores that were not open during the full year of 2007, and an increase in our bad debt reserve due to higher credit risks in the current economic environment.

Our effective income tax rate for 2008 was 38.7% versus an effective income tax rate of 39.6% in 2007. The decrease in the effective tax rate was primarily due to an increase in international sales as a percentage of total worldwide sales.

For 2009, we expect a further reduction in our effective tax rate as a result of the completion of buy-in payments for our Simple and UGG brands intellectual property rights, which were taxable in the U.S. at a higher tax rate. In addition, we expect that our international sales will continue to increase.

Excluding the impact of the impairment charges detailed in today’s earnings release, net income for the full year was $95.9 million or $7.27 per diluted share compared to $66.4 million or $5.06 per diluted share in 2007.

Turning to the balance sheet, at December 31, 2008 our overall inventories increased to $92.7 million versus $51.8 million a year ago. By brand, UGG inventory increased $40.4 million to $67.9 million, Teva inventory decreased $2.5 million to $17.5 million, and Simple inventory increased $1.1 million to $5.4 million. Tsubo brand inventory totaled approximately $1.9 million at year end.

The increase in UGG inventory was primarily attributable to the increase in spring orders currently on our books coupled with retailer requests for more January deliveries, which required us to bring additional product in earlier than last year. The growth of our retail and e-commerce businesses from a year ago also contributed an additional $7.6 million to the increase in UGG’s inventory level as of December 31, 2008.

Furthermore, we did carry over some holiday product from our core boot and slipper collections that have been sold for fall 2009. At December 31, 2008, our backlog of orders from our wholesale customers and distributors for all brands was up approximately 41% compared to December 31, 2007. While all orders in the backlog are subject to cancellation by customers, we expect that the majority of such orders will be filled in 2009.

Based upon our current visibility, we feel very comfortable with our overall inventory levels. At December 31, 2008 we had cash, cash equivalents and short-term investments totaling $194.8 million compared to $168.1 million at December 31 2007, and accounts receivable were $108.1 million compared to $72.2 million at December 31, 2007.

Moving on to our outlook. With regard to our outlook for 2009, based on our current visibility, we expect revenues to increase approximately 6% to 9% over 2008 levels. For the full year by brand, we expect UGG sales to increase approximately 6% to 8%, Teva sales to be approximately 2% to 5% down, Simple sales to increase approximately 20% to 25%, Tsubo sales to be approximately $7 to $9 million and Ahnu sales to be approximately $4 to $6 million.

We currently expect diluted earnings per share to be flat to slightly down compared to 2008 levels, excluding the impact of the impairment charges recorded in the second and fourth quarters of 2008. Our forecast is based on a full year gross profit margin being approximately flat to slightly up compared to 2008, and SG&A as a percentage of sales of approximately 25% to 26%.

It’s important to note that in addition to typical yearly increases in our spending, we expect incremental marketing expenditures to our SG&A in 2009 totaling $10 million or approximately $0.47 per diluted share that Angel will discuss in a moment.

We anticipate our new Ahnu brand to have a negative impact of approximately $0.06 to $0.08 per diluted share for the full year of 2009. In addition, our fiscal 2009 guidance includes approximately $10.5 million of stock compensation expense and an effective tax rate of approximately 38% compared to 38.7% in 2008.

For comparison purposes, while our 2009 diluted EPS guidance is flat to slightly down, if you take the $7.27 included EPS from 2008, back out approximately $0.08 for the pickup and the change in the effective tax rate, and add the $0.47 for the incremental marketing spend and $0.08 for the impact of Ahnu, you’re at $7.74 of diluted EPS, which is about 7% up from 2008 and in line with our sales guidance for 2009.

Our capital expenditures for 2009 are forecasted to total approximately $19 to $21 million slightly down from our 2008 level. For the first quarter of 2009, we currently expect revenues to increase 22% and diluted earnings per share to decrease 28% compared to the first quarter of 2008 levels.

First quarter guidance includes additional marketing investments in Simple and Tsubo of $2 million, lower gross margins compared to 2008 due to higher levels of wholesale and international distributor sale as a percentage of total sales expected this year, and higher levels of fixed overhead for new retail stores, warehouse operations, international infrastructure and general administrative costs.

As a reminder, a significant amount of our operating expenses are fixed and spread evenly on an absolute dollar basis throughout each quarter. This includes the cost associated with the six new stores that were not open this time a year ago. Therefore, due to the aforementioned increases in SG&A, we expect our earnings to decline in the first half of 2009, which is projected to include our lowest volume sales quarters and increase in the back half of the year.

Now I’ll turn the call back to Angel for some closing remarks. Angel?

Angel Martinez

While we’re coming off a very strong year, and we’re one of only a few companies in this phase to begin 2009 with solid momentum, we continue to be confident about our future growth prospects and our ability to maximize the full potential of our brand portfolio. However, the current economic situation and its impact on the consumer environment has retailers across the board planning their business more conservatively than ever and, therefore, we have to as well.

As Tom just outlined, we currently expect full year revenues to increase approximately 6% to 9% over 2008 levels and diluted EPS to be flat to slightly down compared to this past year. Let me provide you with more color on our expectation for 2009, and some additional details on both our near and long-term growth strategies.

In discussing 2009, I believe it is important to look at where we’ve come from over the past few years and what our vision is for the future. As recently as five years ago, the UGG brand was primarily a third and fourth quarter business with a majority of our business in wholesale.

There was a tremendous amount of demand for the brand during the fall and holiday season and we were garnering a great deal of media exposure at the same time. In an effort to build off this momentum and evolve the UGG brand into a year round brand a global life style brand we implemented a comprehensive strategy that we’ve been successfully executing over the past four years.

During this time we’ve significantly diversified the fall line, introduced a spring collection, expanded the men’s collection, launched retail, evolved our e-commerce business and grown overseas. While we’ve achieved much, there is still work to be done in order to reach our long-term goals.

As we begin 2009, we see an opportunity to take advantage of our recent performance and strong balance sheet to further solidify our leadership position and grow our market share. While many companies are being forced to reduce their operating budgets and delay expansion plans, we’ll be accelerating several pieces of our growth strategy.

First our retail division, opening our own stores has been a key part of the UGG brands evolution over the past couple of years, as it has allowed us to merchandise a broad assortment of product, reach new consumers and create a selling environment that does a tremendous job of highlighting the true lifestyle nature of the brand.

Along with the emergence of our e-commerce platform and the recent introduction of shop-in-shops, these new vehicles represent a transformation from our traditional wholesale business to a more complete and enhanced sales and brand building strategy. In 2008, we opened five full price UGG brand stores San Francisco, New York, Beijing and two in London, as well as an outlet in New Jersey to end the year with 13 stores in total.

Our initial plans for 2009 include two new domestic locations and five overseas. Internationally the stores will be primarily in Europe with a couple in Asia. We also plan to expand a number of shop-in-shops this year.

On average, the 40 domestic and 29 international shop-in-shops that were in place for fall 2008 showcased 100 different SKUs compared to approximately 40 for a standard retail customer, and at a minimum drove a 35% to 50% increase in retail sales at these accounts versus the previous year. Beyond the incremental sales benefit, these shops provide us with a great way to educate consumers on the diversity of the product line and ultimately broaden appeal for the entire brand.

Importantly, much of the success we experience with the shop-in-shops came at the expense of our competitors as our casual boots and wedge boots were positioned against other brands and were incremental to our sales of twin-face boots and slippers. We expect to add another 50 shop-in-shops for fall and holiday 2009, including 30 in the U.S. and 20 internationally.

Now to our international plans, the stores we opened in London and Beijing marked our first consumer direct operations outside the U.S. In 2009, we will further expand our global footprint in Japan where we will assume ownership of the UGG Australia boutique store at the prestige Omotesando Hills shopping complex in Tokyo.

We will also, with the assistance of local logistics and sales expertise, assume direct responsibility for our whole sale operations in this important market. Japan has long been a strong market for luxury goods and all indicators suggest a stronger demand and a significantly larger opportunity for the UGG Australia brand in Japan than we realized to date.

We’re confident that under our direction in Japan we can increase exposure and drive demand by selectively increasing distribution and implementing a cohesive and comprehensive marketing and advertising strategy. UGG spring business is off to a good start with no cancellations to date and retailers taking product even earlier than last year. We’re seeing nice success with our new rain boots and our knit category continues to grow rapidly.

We are currently in the process of selling in fall ’09 and the initial response to our expanded line of men’s, women’s and kid’s product, including more casuals, has been very positive. While our retailers are being forced to operate with more caution given the uncertainty in the market place, they’re telling us that, not only did UGG perform well during their holiday season, but it continues to contribute to their full price selling.

Therefore we’re seeing a greater percentage of the total open to buy dollars being dedicated to UGG products and early indications point to most wholesale accounts planning their business up in 2009. I’d like to ask specific acknowledgment for [Connie Reishman] and the UGG team. They’ve executed flawlessly, especially in a difficult environment, we could not have a more talented, passionate and dedicated team. They make it look easy, while all of our competitors know that it is anything but.

For Simple, 2008 was an important year during which we heighten awareness of the brand, continue to add new distribution and experience successful sell through at retail. I believe Simple’s full year performance led by ecoSNEAKS underscores our progress in penetrating the mainstream and has left little doubt there is a place with the brand and its appealing product offering and eco-friendly positioning in the marketplace.

In 2009, we’ve expanded the ecoSNEAKS collection with several new styles, incorporated new fabrics and color patterns and will be introducing our collections four times a year in order to keep the assortments at retail fresh and relevant.

The evolution of the product, coupled with the reaction from retails and consumers, has us optimistic that we can gain market share. In an effort to increase consumer brand awareness and market share, we’ll be making a significant investment in our marketing efforts for Simple.

We’ve hired the fourth largest ad in the world JWT to help us craft a new message that targets a broader audience. The new campaign is called “Less is Greater than More” and is launching this week in extensive national and regional print and online campaign.

Our main focus going into 2009 is to continue to increase distribution. We are launching the brand this March in 200 Journey stores for men and women and for the first time in over a decade we’ll be a part of the Nordstrom anniversary event this summer.

Our plan for Teva is to maintain course in 2009. We’ve been very pleased with the strategic advances we’ve made in repositioning the brand over the past couple of years, particularly in this challenging environment.

The overriding theme for our retail partners has been that Teva is back to being one of the few core brands in the outdoor space. This is underscored by our recent performance within key accounts, most notably REI where Teva was the only footwear brand nominated for vendor of the year.

We begin 2009 with a stronger brand management team and new systems and processes that will improve our forecasting ability. Despite the fact that many of Teva’s retailers have reduced their open to buy dollars by as much as 20%, our initial expectations are for sales to be down only slightly in 2009. And we feel good about the brands ability to weather this challenging period better than most of its competition.

We still believe there is a growth potential for the Teva brand, but the economy, as it is today, has forced us to move out growth rates by a few years. We’ve previously stated that we believe that the Teva brand can generate $140 million of annual sales by 2012. We’re revising that guidance and now expect Teva to generate annual sales of $110 million by 2010.

Last May we announced the acquisition of Tsubo, a moderate to high end casual lifestyle brand, which we are re-launching for the fall of 2009. We are in the process of building distribution and better department stores like Macy’s West, Nordstrom and Dillard’s, as well as independent specialty shops in select metropolitan locations around the country.

Product mix is approximately 70% women’s to 30% men’s and consists of dress, leisure and casual styles. We feel good about what we’ve accomplished since taking over control of the brand and the response to retailers has been encouraging.

We’re working with JWT as well on our new brand message to support the fall launch, and we’ve budgeted an incremental $4 million for targeted marketing and advertising programs, along with new point of sales materials.

Now that said, it is obviously a very tough time to be introducing a new line at retail and we’ll continue to monitor closely the brands progress over the next few months, which will dictate how much of that additional marketing spend is utilized this year.

Now more recently we reached an agreement to acquire the small outdoor brand Ahnu and the transaction is scheduled to close by the end of March subject to customary closing conditions. Over time, we believe there is an opportunity to leverage our position in the outdoor industry to expand Ahnu and grow our share of the outdoor lifestyle market, especially in women’s.

As we’ve demonstrated over the past several years, we run our business conservatively which has served us and our shareholders well. We’ve stayed true to our long-term strategy of how to properly build brands.

Now this is not to say that we don’t or won’t spend money to take advantage of opportunities when they become available, and that is our plan for 2009. While our decision to accelerate certain capital expenditures and increase our operating expense will mitigate our near-term earnings power, we’re confident that these strategic investments will drive future market share gains and better position the company for greater success when the economy recovers.

We believe that our plans, which I’ve stated here, will assist us to achieve our long-term sales targets for 2012 of $1 billion with UGG representing $750 million, $110 million from Teva, $80 million from Simple, and $40 million for Tsubo and $20 million for Ahnu.

With that, I’d like to thank you all for listening and would like to turn the call over for questions.

Question-and-Answer Session


(Operator Instructions) Our first question will be from Jeff Klinefelter – Piper Jaffray.

Jeff Klinefelter – Piper Jaffray

A question on the guidance the up 6% to 8% for the year, can you give us a little bit more color on first half versus second half, and also how much of that would be international versus the international contribution this year given I think you’ve articulated the expansion of doors of the spring product. So, guessing that the front half would be stronger growth then the back half, but just wanted you to share a little bit more color on that.

Thomas Hillebrandt

Jeff, it’s Tom, we haven’t broken down the brand sales by quarter, but from a percentage growth standpoint first half versus second half, yes, I think directionally that’s right at the higher percentage in first half then second half. And regarding international, we’ve indicated that our plans are to increase in retail stores outside the U.S., which would drive some additional incremental international volume in 2009.

Jeff Klinefelter – Piper Jaffray

What about plans for the international distributor and distributors outside of the U.S. generally speaking, as those either come up for renewal or other considerations for acquiring those? Can you give us any more specific details on the outlook there?

Angel Martinez

Yes. We continue to go down that path as appropriate markets become available. We will be taking a very hard look at whether or not those should be part of our subsidiary model. I think the important thing to keep in mind is that we sort of hit on a methodology driven by initial penetration of the market with retail moving from there to the shop-in-shop approach that drives the wholesale business, and eventually beyond that to the consumer direct and the model on the internet.

The other think I mentioned on my comments was Japan. This is a model where it’s particularly appropriate for Japan, we have a currently distributor owned boutique in Omotesando Hills shopping area. That boutique performed extremely well. We feel we can do a much better job. We think there’s an opportunity to build from that small foundation stone, and the consumer in Japan loved UGG, which if you move around the world, that’s the common thread that you see in every market.

We just have a tremendous relationship with the consumer. They love the brand, they love the products. And the frustration they tend to have is they just can’t find it. And when they do, as we have shown in the London stores, they tend to lineup outside even in a tough economic environment. So, as a result we feel pretty confident. There are many, many points of reference that validate our thinking and out methodology as we roll distribution around the world.

Jeff Klinefelter – Piper Jaffray

Two other quick things, Tom you mentioned you increased reserves or bad debt reserves in anticipation of some write-offs. Can you give us a little bit more color there and what activity you’re already seeing coming out of the holiday season? And are you going to be calling some independent distribution or smaller account distribution to try to head-off some of those write-offs in the future?

And remind us, you said you carried some of your fall product forward for ‘09, some of the boot and slipper product. Was that it didn’t sell through in ‘08 and you carried it forward in ‘09, or it was received late? Not clear on that.

Thomas Hillebrandt

I’ll answer the credit one first. Related to this year, obviously with the economy, we had to kind of take a look at some our accounts and how we do the bad debt here is similar to what a lot of companies do you. You look at it from a credit rating standpoint. And so we did downgrade some of our accounts, which led to some increase in the reserve for those accounts, and we’ve been working through things here in the first quarter and seeing how things shake out.

I mean everybody sees the big names out there, but from an exposure standpoint of there being lots of or any significant amounts of write-offs so far in 2009 we have not seen that yet. Regarding the carryover inventory, it's inline product that we had more in inventory then what we’ve had in the past. And so, again, it's inline and we’ve got orders for it to go out the door in fall of ‘09. So we weren’t concerned about the carryover that inventory, but it did contribute some to the year end balance.


Our next question is from Jeff Mintz – Wedbush Morgan Securities.

Jeff Mintz – Wedbush Morgan Securities

Angel, could you give us a little more detail on the Japan transition and what the timing of that is, whether there’s any cost to you guys in order to take over that distribution and how you think it impacts ‘09?

Angel Martinez

Yes. We expect to move fairly quickly. We’ve been in conversation with them now for quite awhile. As I said, it will begin with taking over the mall boutique that they have. We’re looking at expanding into a full blown concept store and that we feel is a big opportunity. Obviously real estate pricing is coming in our direction in lots of the world.

So we’re kind of keeping our power drive but it’s all about location. So from that foundation we’re going to be driving the brand growth to shop-in-shops beyond that. So it’s a fairly aggressive attack, but I feel the market in Japan is ready for our brand and has been looking for it.

Jeff Mintz – Wedbush Morgan Securities

And the incremental advertising you’re doing in 2009 does that kind of then roll into 2010 as part of your SG&A expense or can we expect to see kind of a little bit of a pullback as we roll into 2010?

Angel Martinez

You’ll see us pullback to more normal levels. I mean one of the things about building brands is you make all this investment in building the product line getting it exactly where you want it, creating spread and assortment so that you have an appealing mix for the retailer then you build distribution.

Let’s talk about Simple for a moment. And just when you get to that point the brand requires now an influx of investment to bring the brand to life at retail because you’ve now got the distribution you’ve been looking for to get it sold through.

And that’s really what Simple’s need is really specifically consumer awareness, and JWT has done a great job of helping find a more universal appealing message for the brand and we’re really excited about rolling it out. So that’s an important component of everything we’ve been working on to get to this point with Simple.

On the Tsubo side, here’s a brand that has tremendous potential, we feel it fills a very important void in the market place. We’ve had a great response to the fall ’09 product line, and if we to just invest on the standard and typical allocation of marketing dollars based on sales, we wouldn’t make one little dent in the market, we wouldn’t draw any confidence from our retailers.

We wouldn’t have the money to invest in point of sale or pop. So it requires an effort against getting this brand launched in a way that gives the retailer confidence that it’s a brand to build on. So that’s the rationale behind and we expect, as we move forward, we’ll revert back to more normal investment levels.

Jeff Mintz – Wedbush Morgan Securities

And, Tom, finally back to the accounts receivable balance, obviously it looks like it is up pretty significantly year over year. What’s the aging look like on that and is that something you expect to work down as we get kind of the end of the first and second quarter.

Thomas Hillebrandt

We’ll definitely work down from an aging standpoint I think things still look pretty good. We have seen a little bit of slowing on payments, again, given the current situation it’s not too unexpected. It hasn’t deteriorated dramatically but we have seen a little bit of slowing.


Our next question is from Todd Slater – Lazard Capital Management.

Todd Slater – Lazard Capital Markets

My question is on the revenue expectations for UGG in the near-term here. You mentioned that you had a 40% plus, I think, order backlog and your guiding in the 20% range in revenue, so I’m just wondering if you can walk us through the differential there and reconcile the difference.

I think you mentioned you weren’t any order cancellations, there’s been a lot of sort of speculation in the market about order cancellations from big retailers and I just wanted you to clear that up for us and give us a sense of what your expectation are on the order side.

Thomas Hillebrandt

Well, specific to the backlog comment and question, the increase that I stated in my section is a backlog that is all orders, not just spring, it includes spring and fall. So it’s not just looking at the spring business.

Todd Slater – Lazard Capital Markets

How does that compare to where you had hoped they would be?

Angel Martinez

I think we’re very happy we’re very satisfied with where we sit on our backlog. It’s an indication of how well received the fall ’09 product has been. And certainly the enthusiasm over spring, which as I said, we have had no cancellations on.

Todd Slater – Lazard Capital Markets

Okay. Just a quick question on the stock comp the 10 million is that around the same level as last year can you minus or is there an incremental number there?

Thomas Hillebrandt

No. The stock comp is up this year. It’s about 300,000 up.

Todd Slater – Lazard Capital Markets

Is that ’09 number versus ’08?

Thomas Hillebrandt



Our next question is from Chris Svezia – Susquehanna financial Group.

Chris Svezia – Susquehanna Financial Group

Just I guess a couple questions. First just a follow-up on the prior question, Tom you had talked about the 41% increase in the order backlog and that’s obviously for spring and fall in terms of what you’re seeing right now.

I guess reconcile that with your overall revenue growth up six to nine given the fact that you obviously are anniversarying significant store growth in Q4 this past year, and obviously looking to continue open up retail doors as well. So I’m just trying to get some understand or reconcile between the increase in backlog broadly speaking and your revenue outlook for ’09.

Thomas Hillebrandt

The increase in backlog, again, we don’t’ have all of the orders for the full amount of revenue. You do have a portion of your business that is not pre-booked. In particular all of the consumer direct but retail and e-commerce, which for us right now in 2008, was roughly around 15%.

So you’ve got that piece of the business that you don’t have a pre-book on so you need to factor that into account, as well as when we do the guidance and fortunately for spring we have not seeing any cancellations. It’s too early to say about fall. So we’ve conservatively made some assumptions regarding cancellations in fall as well.

Chris Svezia – Susquehanna Financial Group

Okay. Angel, when you heard mentioned that a lot of your key accounts, I guess that applies to the U.S., where you’re getting additional open to buy and they’re planning you up potentially for fall. Could you just maybe add some color about existing accounts that you have and potentially new doors or new expansions Nordstrom is opening a couple of doors, Journey is opening doors, Neiman Marcus, etc.

Can you maybe just add some color between existing comp store growth and potentially incremental additional growth for the brands?

Angel Martinez

Yes. Obviously I can’t comment on specific customers, but as a general statement, one of the things that’s occurred as a result of the success that we’ve had in 2008, is the retailer having a much higher confidence level with the brand performing for them in a tough environment, especially at full price. So you tend to put your open to buy dollars against what is working and what generated most revenue, and that seems to be what’s going on.

So we’re really get share across the board in existing doors from the competition. In addition, we’re getting a good response to the men’s line and the kid’s line, so that’s also offering up an opportunity to grow spread and assortment in the existing account base.

And as I mentioned earlier, it isn’t just the shop-in-shops, but as a result of more spread and assortment, you have a much better enhanced retail presence, which creates for the consumer more excitement more opportunity to bring more colors and new styles, which sort of feeds on itself. So the bulk of what we’re seeing is really driven by in the U.S. the existing account base selling more of our products.

Chris Svezia – Susquehanna Financial Group

Okay. Then just on the inventory, I guess I got to ask this question. The UGG inventory, and correct me if I’m wrong here, looks like it’s up 148% or so coming out of the fiscal year. You threw out obviously you have some carryover products you’re obviously building to some degree for spring business.

But given kind of the revenue outlook for the brand for the year, kind of walk us through and get us comfortable with that level of increase of inventory in terms of what you’re sitting on right now relative to your outlook.

Thomas Hillebrandt

Sure this is Tom. As I had mentioned, we did have some carryover so you’ve got some of that built in there at the end of year. Just looking at Q1 kind of the order flow this year was heavier in January than it was last year. So we had to bring stuff in earlier related to Q1 to have it in at the end of the year.

And then also, as we expand our retail business internationally, that does add incrementally to our revenue. Here in the U.S. we’re able to service those retail stores out of our warehouse in Camarillo. Obviously internationally we can’t do that so we do have to have a pool of inventory available in Europe and in Asia to service those stores over there. So that’s added some incremental inventory to the UGG balance at the end of the year as well.


Our next question is from Mitch Kummetz – Robert W. Baird.

Mitch Kummetz – Robert W. Baird & Co.

I’ve got a few questions and just a follow-up on the backlog. Tom, you mentioned that between retail and e-commerce that’s about 15% of your sales that business in not pre-booked. Could you say how much of your wholesale business is pre-booked versus at once?

Thomas Hillebrandt

No. We haven’t disclosed that. We have indicated that when you break it down by brand, UGG does have a higher percentage of pre-book on its wholesale than the other brands, but we haven’t given a percentage.

Mitch Kummetz – Robert W. Baird & Co.

And then you mentioned your obviously making some assumptions for cancellations on fall orders, are you also assuming that reorders are going to be pretty minimal as well over the course of the year?

Thomas Hillebrandt

We have conservatively estimated the back half.

Mitch Kummetz – Robert W. Baird & Co.

Okay. And then I don’t know if I caught it. When you talked about the backlog, did you say that was as year end or was that as of the date of the call or?

Thomas Hillebrandt

No. That’s of 12/31/08.

Mitch Kummetz – Robert W. Baird & Co.

Okay. How much of your fall orders are typically in at that point? And what percentage of your overall fall order book is usually you have paper in hand by that time of year?

Thomas Hillebrandt

We haven’t broken that down.

Mitch Kummetz – Robert W. Baird & Co.

Okay. Angel, on Japan I guess I’m a little confused there. I know that’s been a small market for you guys in the past, but if I guess just sort of clarity on that. So your saying you’re taking over that one store and you’re also taking over the distribution rights to the Japanese market, is that correct?

Angel Martinez

Yes. We are taking over the wholesale distribution in the Japanese market, correct.

Mitch Kummetz – Robert W. Baird & Co.

What does that whole sale distribution look like today is it just that one store?

Angel Martinez

No. We have a few customers, but it has not been satisfactory the way that the business had been growing there. We think the demand far exceeds supply, as is sometimes typical with distribution arrangements between brands like ours and some Japanese companies. There’s a very, very slow and ultraconservative approach to building the business, which we feel that there’s significantly more opportunity than that. So that’s a large part of why we’re taking over.

Mitch Kummetz – Robert W. Baird & Co.

From where will you be running that business?

Angel Martinez

We’ll be running the business from, well we’ll have a group in Japan overseeing the Japanese business, and we’ll be slowly building an infrastructure from there combined with our greater Asia Pacific strategic office and driving that out of Hong Kong.

Mitch Kummetz – Robert W. Baird & Co.

How quickly can you ramp up that wholesale distribution? I mean will you be taking orders for fall or is this more of a 2010 event?

Angel Martinez

I think it’s more of a 2010 event. I think you’ll see us evolve the 2009 retail business and then working with the selected distribution that we currently have to enhance our presentation and really establish the brand platform and the positioning for the brand as a premium brand. And there is a lot of excitement about that with the better department stores with opportunity for shop-in-shops and this kind of thing.

Mitch Kummetz – Robert W. Baird & Co.

And then lastly on that, did you buy back the distribution rights or did that distribution agreement run its course or how did that transpire?

Angel Martinez

The distribution agreement ended.

Mitch Kummetz – Robert W. Baird & Co.

And then just two other items, in terms of UGG performance for the year, I guess there’s still a fair amount of investors concerned out there about this just being a single item brand and it’s all driven by the classic boot. So maybe you could help us a little bit and let us know what percentage of your UGG sales for the year were driven off the classic, and maybe talk about the growth year-over-year in the classic boot versus other product in the UGG business?

Angel Martinez

Again, I won’t comment on the specific percentage. All you have to do is go look at what’s at retail, what’s on display and talk to any retailer about the significance of non-classic UGG in their stores year round, including sandals and the variety of other products, wedges that we were super successful with, the Cardy boot, which is a knit boot in an entire category now all on its own.

The brand has evolved so far past that dependent on the one item. Yes, it’s an important item, there’s no doubt about it. Air Force One is an important item to Nike, so is Air Jordan. Those are core items that are pillars of the brand, but the brand is built on far more than that.

And again, you talk to any retailer out there and they’ll tell you what’s performing at retail and UGG is the brand it’s not the item. They’re all very happy they’re not 100% dependant on classic boots and that was the strategy from the beginning, which we’re very proud of the fact that we evolved to this place. It’s a great place to be.

Mitch Kummetz – Robert W. Baird & Co.

And then last question for Tom. If I take the midpoint of your sales guidance for the year and the midpoint of your SG&A outlook, I guess I’ve got SG&A coming up around 36.5 million, 20.5 for those two items you mentioned. So where else are you seeing your SG&A increase, and are there any areas within the cost structure of the business that you’re actually attempting to take down expenses at this point given the environment that we’re in?

Thomas Hillebrandt

Well, the other increases, as I kind of pointed out, one is just in the stores so you’ve got additional SG&A. We tend to open our stores in the back half of the year and mostly in the fourth quarter, which is when they’re the most profitable and have the highest sales. So when you kind of grandfather them in for the full year, you’re picking up that overhead on a full year basis.

Also at the end of ‘07 and into ‘08, we enhanced our capability in our warehouse and added the pick module, so we’ve got some additional infrastructure costs coming online for that. And then internationally, as we’ve been talking about, that’s a big focus of ours to expand and grow and to do that you do have to invest in some infrastructure and people on the ground over in those countries to help make all that happen.


Our next question is from Jim Duffy – Thomas Weisel Partners.

Jim Duffy – Thomas Weisel Partners

Angel, question for you. You mentioned in the fall order book or in fall open to buy dollars you expect to gain share. Do you have a feel for where overall retailer open to buy dollars for fall? What percentage that will be down?

Angel Martinez

I really don’t. It just really depends to a large extent by class of trade. We know that in the outdoor industry we’re seeing 20% reductions in open to buy. I think retailer to retailer, some are doing better than others, so it’s just really hard to say. We just look at what kind of response we’re getting to UGG and I think we’re going to grow a share as a result of some of the weakness that’s inherent out there in the competition.

Jim Duffy – Thomas Weisel Partners

So maybe looking at some of the publicly traded department stores and the comp guidance that they’ve given, are they planning open to buy dollars down more than the comp guidance that they’re giving?

Angel Martinez

I think what they’re doing is they’re keeping their powder dry. A lot of them are not committing to open to buy dollars so early in the year. What they’re saying is they are going to chase the business as it becomes available as they see the economy improve. They want brands to be able to service them in much quicker turnaround so they don’t have to make those kinds of commitments. So to a large extent, it’s a bit of a moving target.

I think there are people out there who are just pulling back completely because they feel that there is some weakness inherent to their business. Perhaps their business was soft before this whole thing happened, maybe their stores were not well merchandised, the product mix was wrong. There are other retailers out there who are quite strong and we haven’t seen a significant reduction in their approach.

They’re being actually certainly aggressive with us and wanting to grow their business with us. So you almost have to do it on a store-by-store basis. Yes, across the board it’s a bit of a nightmare for people. There’s no doubt about that. It’s just hard to predict what’s going to happen and there are some scary predictions of consumer behavior out there. So, you want to keep your powder dry. I think that’s how people are approaching it.

Jim Duffy – Thomas Weisel Partners

And then with regards to the long-term objectives to 2012 and a billion in revenue, that implies a 10% top line CAGR. Like in 2009, does this plan require investment in SG&A that runs ahead of the rate of revenue growth?

Angel Martinez

I don’t think so. I think we’ve been making the investments necessary to get to that level strategically over the last few years and we’ll continue to do that, but it won’t be ahead of the rate of revenue growth.

Jim Duffy – Thomas Weisel Partners

And how many years do we need to look into the future to see leverage on the SG&A line? At what point will all those investments be made such that you can start to benefit from them?

Angel Martinez

I would probably give it a couple years.

Jim Duffy – Thomas Weisel Partners

After hours here stocks kind of trading in the high 40s, which puts it at about 2.5 times enterprise value to EBITDA. For shareholders on the call, why wouldn’t you guys see it as good use of the cash to buy back shares at such a low valuation?

Thomas Hillebrandt

Jim, it’s Tom, I’ll take that one. From just our cash standpoint, what we feel is a better use of it right now is investing in this business. We’ve got working capital needs and, while we have 200 million at the end of the year, if you go back and look at our cash, it fluctuates pretty significantly because of our working capital needs.

So just given the environment we’re in right now, we think it’s a good idea for the company and the shareholders for us to have such a strong balance sheet that we have with our cash and not take and use it to do a stock buyback as you suggest given this environment, that we’re better suited to have the cash on our balance sheet, have it there so that we can meet our working capital needs and continue to grow the business.

Angel Martinez

We also feel there’s an opportunity with we’re in a position certainly with UGG that’s somewhat enviable I’m certain and it gives us opportunity. It gives us an opportunity to grow share and establish a very strong foundation for growth going forward. At some point, the economy will turnaround and having been a retailer myself, I know that you never forget who was there to help you and support you and help you struggle through a bad time.

As a total company, our brands are there to support our retailers, we’re there to provide them with the opportunity to grow their business and certainly survive some tough times and maybe a little more reliance on UGG than in past years. That is a good thing for UGG right now because we’re going to grow some share. We’re going to be stronger as we come out of this than we were going in.

Jim Duffy – Thomas Weisel Partners

So do you expect to use the balance sheet to help retailers through this and how much cash do you need to support the working capital needs of the business as you look forward? My model looks like you’ve got a pretty good buffer.

Tom Hillebrandt

Yes. We do have a good buffer but, again, if you look at kind of the flow through to the year in our working capital cycle, we tend to buildup in Q2 and kind of get the low point in cash around in third quarter. And as we talked about we do need to invest in inventory internationally so there are incremental needs there.

Specific to helping out retailers, as I had indicated earlier in talking about the payment cycle, we are seeing a little bit of slowing and so that takes some additional working capital to provide cushion for that. So those kinds of things are what we’re thinking of.

Angel Martinez

The independent retailer out there really does value in these times dating on their invoices and we’re able to do that to support them where necessary. Shop-in-shops is another thing that we have an opportunity to get more real estate in stores because of the strength of our brand and that costs money. So even though we do share that cost with the retailer, we want to be aggressive in growing that opportunity. I just think we’re in a strong position and we like the use of cash to keep us there.


Your last question comes from Howard Tubin – RBC Capital Markets.

Howard Tubin – RBC Capital Markets

Angel, any more detail you can give us around the marketing plans for Simple and Tsubo?

Angel Martinez

Well, as I said, for Simple we’ve come so far with ecoSNEAKS and one of the important things to understand about ecoSNEAKS is not just it’s appropriateness for the market given the sustainability story and the eco-friendly nature of the product, but also the price point, $55 to $60 is what we call a killer price point in that kind of product.

And the product line has now evolved to be very strong for men’s and women’s and kids. We think there is a very significant core business out there in vulcanized footwear like that, which we feel that very little less fresh in the market and the retailers are telling us when they see the line that they agree with that.

So we’re going to be supporting our retailers. We’re going to be out there with point of sale. We’re going to be tagging them on ads. We’re going to be doing a variety of things necessary and more importantly, get the message out to include more people. I think the previous message from Simple was a bit exclusive.

If you weren’t of a certain environmental or ecological mindset we were inadvertently putting up a barrier. You had to be a certain shade of green to buy Simple and this new message changes that and invites more people in and we’ve tested it and we feel that it’s very appropriate. So there is an opportunity.

On the Tsubo side, again as I was saying, we’re not going to go out with a brand this good with the response that we’ve had in the fall that this strong with a pea-shooter. You really got to get out there and make sure the retailer understands you’re serous about this, it’s a great opportunity. You’re going to pick your shops in the key markets around the country and really try to drive some business and bring consumers to something new and fresh.

So it’s an exciting opportunity. We will continue to do that kind of stuff. We’re a product and marketing and consumer driven company and to pullback when you have nothing to drive is one thing, but to pullback when you’ve got great products and great brands, that’s a whole other thing. It’s a little bit counterintuitive.


Gentlemen, please continue with any closing comments you may have.

Angel Martinez

I’d like to thank everyone for sitting in on the call. Clearly, it’s been a record year. We’re very proud of our team and thankful for all of you that have been supporting our brand and where we’re going down the road. So we will look forward to talking to you again in the end of first quarter.


This does conclude your conference for today. We thank you very much for your participation. You may now disconnect.

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