Deckers Outdoor Corporation Q1 2010 Earnings Call Transcript

Apr.26.10 | About: Deckers Outdoor (DECK)

Deckers Outdoor Corporation (NYSE:DECK)

Q1 2010 Earnings Call Transcript

April 22, 2010 4:30 pm ET

Executives

Angel Martinez – President, Chairman and CEO

Tom George – CFO

Zohar Ziv – COO

Analysts

Jeff Klinefelter – Piper Jaffray

Todd Slater – Lazard Capital Markets

Scott Krasik – BB&T Capital Markets

Mitch Kummetz – Robert W. Baird

Sam Poser – Sterne, Agee & Leach, Inc

Chris Svezia – Susquehanna Financial Group

Andrew Burns – Thomas Weisel Partners

Howard Tubin – RBC Capital Markets

Chi Lee – Morgan Stanley

Operator

Good afternoon ladies and gentlemen, and thank you for standing by. Welcome to the Deckers Outdoor Corporation’s first quarter fiscal 2010 earnings conference call. At this time all participants are in a listen-only mode. Following the presentation we will conduct a question-and-answer session. (Operator instructions) I would like to remind everyone this conference call 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 maybe beyond its control, could cause Deckers actual results to differ materially from those described in this call.

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

Deckers intends that all of its forward-looking statements in 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.

I would now turn this conference over to the President, Chairman and Chief Executive Officer, Mr. Angel Martinez. Please go ahead, sir.

Angel Martinez

Thank you operator and welcome to everyone joining us on the call today and listening via web cast. With me are Zohar Ziv, our Chief Operating Officer; and Tom George, our Chief Financial Officer.

As you saw from our press release issued today, after the close the first quarter ended up being stronger than we anticipated. Particularly from an earnings perspective, diluted EPS increased approximately 47% to $1.37. That was also driven by another record first quarter for the UGG brand, with Q1 sales topping $100 million for the first time, combined with a very strong start for the year for the Teva brand.

Our retail stores both domestically and overseas were key drivers of our Q1 results, highlighted by same-store sales growth of 28.2% during the quarter. We witnessed strong consumer demand for the UGG brand spring line, particularly boots like the Lo Pro, the Cardy and the Classics in spring colors. In addition, our new sneaker line led by the Avera [ph] performed extremely well.

The arrival of warmer weather in March coincided with the introduction of UGG sandals and flip-flops in our stores, resulting in healthy sales over the past months. In addition, our eCommerce business was also above plan, and it was the combination of these two high margin businesses that drove the majority of the sales and earnings upside.

Four years ago, as part of our growth strategy we made the decision to expand our retail distribution with our company owned UGG Australia stores. These results demonstrate clear evidence of the strong payback on this strategy. The performance of the UGG brand in our department specialty and independent store base has also been solid. The selection of spring products at our wholesale accounts is broader than a year ago, as retailers are getting more and more confidence with the UGG brand as a year-around brand.

They are accepting a wider selection of styles, including sandals, casuals and our new sneaker collection, which as I mentioned has had a strong debut. We are just completing very extensive market research regarding UGG brand consumers. Our research in the US indicates that we have an expanding, diverse and loyal customer base, showing upside potential in all age groups.

For example, 22% of females surveyed aged 13 to 54 stated they have not yet purchased UGG products, but are considering doing so in the future. Only approximately 20% to 25% of UGG consumers are between the age of 13 and 17. However, at the same time we have very well developed and loyal teen base with room for significant upside as evidenced by 40% of female teens responding that they definitely or probably will buy UGG products in the next 12 months.

Given that once women have converted their purchase, they tend to repeat purchase and wear UGG products more often, our research has enthused us about the future growth opportunities. Building on this brand loyalty will be a key marketing focus in late 2010 and beyond. At the same time, our Teva brand delivered one of its best quarters in several years, as sales increased 21% from a year ago.

Despite some very wet snowy conditions in January and February that negatively impacted early spring sales for much of the industry, the Teva brand experienced solid sales through key retailers such as REI, Nordstrom, and exporting it throughout the quarter with sales accelerating above plan in March.

Over the past few years, we have gone from struggling to appeal to younger demographic groups for the Teva brand to the brand that is gaining market share. This progress has been achieved through our commitment to evolve the Teva brand beyond its authentic roots in the sport sandal category and to lessen the brand’s dependence on weather. This season's line is by far our most complete from top to bottom with diverse collections of both open and closed toe styles at a variety of price points.

This year, we have a meaningful amount of quality close toe products for spring, versus just a handful last year, and in fact several have been some of our best performers year-to-date. Our enhanced merchandize assortment combined with updated point of sale materials is resulting in much better product placement at retail, and is helping the brand to establish a stronger more consistent presence across all channels of distribution that better reflect the Teva’s brands position as an outdoor industry leader.

While the first quarter is typically the smallest volume quarter for our international division, the Teva business in Europe was up nicely on the strength of our expanded line of men's and women's closed toe footwear, after realizing the benefit of assuming the distribution of the products in the Benelux.

We are also starting to gain better traction with the UGG brand spring business, particularly in Benelux, which currently sells the largest selection of spring products outside the United States. Our international wholesale distribution model is now in its second year in Japan, and we continue to be very pleased with our decision to convert the business from the distributor model. We are just starting this process with the Teva brand in the Benelux region and France, while at the same time building up an infrastructure to support larger wholesale operations in Europe beginning next year.

We are excited about the long-term sales and earnings potential we believe converting from distributors to wholesale sales in select markets will provide the company in years to come.

Tom will now go through the financials in more detail, then I will review our plans for the remainder of the year. Tom.

Tom George

Thanks Angel. For the first quarter of 2010 net sales increased 16.2% to $155.9 million versus $134.2 million for the first quarter of last year. Including sales from the whole sale division as well as retail and eCommerce businesses net sales of UGG products increased 14.2% to $104.4 million versus $91.4 million for the first quarter last year.

Net sales of Teva products increased 21.4% to $43.2 million in the first quarter compared to $34.6 million in the same period of 2009.

Combined net sales of the company's other brands were $8.4 million for the first quarter of 2010 compared to $7.3 million for the same period last year, a 15% increase over last year.

Included in these numbers are global retail store sales of $23.1 million up 66.1% from $13.9 million in the first quarter of 2009, driven by five new stores and the same-stores sales increase of 28.2%.

Sales for our eCommerce business, which are included in the brand sales numbers as well increased 13.8% to $18.4 million for the first quarter compared to $16.2 million for the same period a year ago. Most of the Q1 sales and earnings upside was driven by the retail stores and eCommerce, which at this early stage in the roll-out of stores is more difficult to predict than our prebooked wholesale business.

In summary, on a combined basis total consumer direct sales, both retail and eCommerce combined for Q1 were 26.6% of sales compared to last year 22.4% of sales. Also included in the brand sales numbers, domestic sales for all brands increased 14.7% to $117 million compared to $102 million in the first quarter of last year and international sales increased 20.8% to $38.9 million compared to $32.2 million in Q1 2009. International sales were 25% of total sales up from 24% last year.

Our gross margin for the current quarter improved 610 basis points to 50% compared to 43.9% in the first quarter of last year. This increase was attributable to the higher sales from our global retail and eCommerce businesses, which carry higher gross margins than our wholesale business, as well as improved product margins, including improved Teva, international margins resulting from being direct in the Benelux region.

Total SG&A expenses for the quarter were $49.1 million or 31.5% of net sales compared to $39.6 million or 29.5% of net sales a year ago. In addition to variable SG&A cost increasing with increased sales, we had planned SG&A to increase in absolute dollars due to other factors including increased payroll and infrastructure costs, fixed costs related to five new retail stores opened this year versus last year and costs associated with our Teva distribution in Benelux, both the costs incurred within the distribution as well as the ongoing operating expenses.

Operating income for the quarter was $28.8 million or 18.5% of sales compared to operating income of $19.3 million or 14.4% of sales last year. The improved operating margin was mainly attributable to the aforementioned gross margin increase more than offsetting the increased operating expenses associated with our retail and international growth initiatives.

Interest income was $19,000 in the quarter compared to interest income of $0.6 million in the first quarter of last year, and the decrease was the result of significantly lower market interest rates versus the same period a year ago, as well as our decision to shift our cash equivalents and short-term investments to just highly liquid instruments.

Net income for the first quarter of 2010 increased 45% to $17.9 million from net income of $12.3 million, and the first quarter diluted earnings per share increased 47.3% to $1.37, up from $0.93 in the first quarter of last year.

Now, turning to the balance sheet, at March 31 our overall inventories increased 3.7% to a $68.8 million versus $66.4 million a year ago. A very favorable comparison given our sales grew 16.2%.

By division UGG inventory increased 2.4% to $44.5 million, Teva inventory increased 24.3% to $18.7 million, and the other brand inventory decreased by $2.3 million. In addition, at March 31, we had cash and cash equivalents totaling $357.3 million, up 55.4% compared to $230 million of cash, cash equivalents and short-term investments a year ago.

Accounts receivable were $54.6 million, down 3.1% compared to $56.3 million at March 31, 2009. And although we did not repurchase stock during the first quarter we still have $30 million remaining on our repurchase authorization.

Now moving to our outlook, based on our better than expected first quarter results coupled with an improved outlook, including increased sales projections for the UGG and Teva brands, we are raising our 2010 guidance. We now expect full year 2010 revenues to increase approximately 13% over 2009 levels, up from our previous guidance of approximately 11% growth. We now expect UGG brand sales to increase by approximately 11%, up from our previous expectation of 9%, and Teva brand sales to increase in the mid-20% range, up from our previous expectation for growth in the low 20% range. Our other brands combined are still expected to increase approximately 20%.

We currently expect diluted earnings per share to increase approximately 11% over 2009 non-GAAP diluted earnings per share of $8.94 per share, which excluded pre-tax non-cash impairment charges of $1 million on intangible assets, as discussed in our related earnings release, up from previous guidance of approximately 5% growth.

Our forecast is based on a fully gross margin of approximately 48% and SG&A as a percentage of sales of approximately 26%. As a reminder, in preparation for transitioning to direct wholesale for the UGG, Teva, and Simple brands in the UK, and UGG and Simple brands distribution in the Benelux region in 2011, as well as Teva Benelux and France transition this year, we will incur additional expenses in 2010 for the new initiatives to establish the infrastructure necessary to support broader wholesale operations beginning in 2011.

Also because of the transition, sales of approximately $10 million will shift to 2011 under our wholesale model that would have been recognized as international sales in November and December of 2010 under a distributor model. In total, these incremental expenses and profit shift of $8 million will have an estimated diluted earnings per share impact of $0.38 of which approximately 65% is a one-time impact.

Furthermore, due to the impact on our international pre-tax income from the aforementioned expenses in 2010, our effective tax rate is expected to increase to approximately 37% from 36.2% in 2009. When you exclude the impact of these investments, we are guiding to strong earnings growth of 15%, well above the 11% sales guidance.

The capital expenditures for 2010 are expected in total to be approximately $25 million to $30 million, a $10 million to $15 million increase from our ’09 level of $15 million, driven mainly by the build out of new retail stores as well as the new eCommerce platform and PLM software.

For the second quarter of 2010 based on our current visibility, we expect revenues to increase approximately 25% and diluted earnings per share to be flat compared to the second quarter of 2009 non-GAAP diluted earnings per share of $0.26, which excluded pre-tax non-cash impairment charges of $1 million on a tangible asset as discussed in our related earnings release.

Second-quarter guidance includes estimated estimates of approximately $1 million or $0.05 per diluted share of incremental investments associated with the international distribution transition, as well as higher levels of fixed overhead for new retail stores, international infrastructure and other general and administrative costs. This is being partially offset by improved gross margins due to higher retail mix, and improves brand wholesale margins compared to the second quarter of 2009.

A significant portion of the company's operating expenses are fixed and spread evenly on an absolute dollar basis throughout each quarter, resulting in impact on earnings in the lowest volume sales quarter, which historically has been the second quarter.

When you exclude the impact of the international distribution investments, we are guiding to 19% earnings growth for the second quarter. One final comment before I turn it back to Angel, given our current stock price trading range and in an effort to improve trading dynamics, including increased trading liquidity, we are currently planning a three for one stock split in June, subject to shareholder approval of an increase in our authorized shares at our May stockholder meeting.

I will now turn the call back over to Angel.

Angel Martinez

Well, thanks Tom. On our year end conference call in February, we outlined how we plan to grow each of our brands this year, while also investing in the business for the long term.

Let me quickly review these strategies and update you on our progress. For the UGG brand, the business currently falls into three primary areas, domestic wholesale, domestic consumer direct and international. Our domestic wholesale strategy is centered on driving higher productivity by expanding our floor and shelf space and increasing unit volume with our current account base of national department stores, specialty shops, regional chains and independents.

We continue to have success in improving our presence with the majority of our accounts thanks to a much expanded UGG brand product offering for both spring and fall holiday. This spring, we have seen a strong consumer reaction to our diverse selection of boots, sandals and flip-flops, and as I said earlier the initial response to our new sneaker line has been very strong.

We recently completed our fall pre-book process, and we are very pleased by the trends we are seeing in terms of the broad mix of products being ordered by our wholesale accounts. Early indications point to nice gains for our women's casual boots, including metropolitan, Soho, [ph] Surf and our cold weather collections for men and women, featuring Beaud's [ph], Adirondack II [ph] and Hilgards [ph].

We had solid growth in new categories such as our wood bottom claws [ph] and boots. And our sneaker collection featuring the Ryland, [ph] the Evera and our sneaker bottom boot, the delaine [ph]. We are excited about this new UGG sneaker collection, especially the opportunity for the fall and back-to-school season. As we have not had a viable sneaker product to properly address this large segment of the footwear market for now.

Consumers will be presented with our most diverse line of UGG footwear ever in very compelling fashion, thanks to an even greater presence at retail this fall, including more than 110 Shop-in-Shops [ph], at key independent accounts in the US, up from 70 last year. This is in addition to the large in store displays that the majority of our national accounts such as Nordstrom, Bloomingdale's, Dillard's, and Lord & Taylor invest in for the fall and holiday selling season.

Next, we plan to increase our company-owned retail locations by almost 50% with the planned opening of nine new UGG Australia stores this year. Six of these are planned in the US, with all but one of them in new cities. We have some really great locations lined up that we are excited to share with you on our next earnings call once the deal are finalized.

We also plan to open three stores in China, two in Shanghai and one in Shenyang. Our retail stores continued to perform exceptionally well with quick cash paybacks, and extremely high internal rates of return, in addition to doing a fantastic job of presenting the brand and highlighting the lifestyle nature of the brand.

The last piece for the UGG brand is international expansion. This year we are focused on working with our distributors to continue expanding the brand within their respective markets, by increasing the breath of styles that the retail customers carry. Growing within the existing accounts, including more than 100 new Shop-in-Shops and opening new points of distribution.

We have seen very good success with our core product lines throughout parts of Europe and Asia, as well as in Canada. We are now looking forward to building on that momentum with the introduction of newer collections that have performed so well here in the US over the past few seasons.

And at the same time, we are preparing for the roll-out of our wholesale distribution model next year in the UK and Benelux. These are the UGG brands top two international markets and each are planning for a strong fall season. So we believe we will be heading into the next year with a lot of momentum behind the brand and continue to develop the brand in these markets.

Turning to the Teva brand, where strong first quarter has set the pace for what we believe to be a very promising year for the brand. This spring we have seen retailers once again embrace the Teva brand as a vital piece of their outdoor strategy. While the sell through performance underscores consumer reaction to our much expanded line of sports sandals, light hikers, amphibious products and casual footwear.

Based on Teva’s early results, we head into the second quarter with good momentum and are well positioned to capture some meaningful fill-in business on top of our scheduled deliveries. In addition, the performance of our spring closed toe product, which came on top of solid full priced selling last fall, is fuelling better-than-expected orders for the back half of 2010. This fall, will feature updated looks from many of our top sellers like the Riva for men and the Dahlia for women.

And there is a lot of excitement about our new MXT or mountain cross training collection of outdoor multisport footwear for men and women. The initial line consists of three styles with US price points between $90 and $130, and we believe the potential exists to expand this category into a sizeable year-around contributor to the Teva brands results.

Overseas, we are witnessing similar trends for the Teva brand, where our closed toe products are also resonating very well with consumers, especially in Europe. Meanwhile, our conversion of wholesale from distributor sales in the Benelux region and France is going very well and is driving incremental sales and margins for the brand while creating new distribution opportunities throughout the region. Our growth prospects for fall appear promising, with most of our international distributors currently planning to do -- to double the size of their fall business from a year ago.

As you can hear, there are a lot of positive things going on with the Teva brand right now. I want to take this opportunity to congratulate Peter Worley and his team for the work they have done over the past several years. The brand has come a long way in the five years since I joined the company in terms of product, positioning and relevance, and I'm confident that this is just the start of an exciting new chapter in a long and successful history as the Teva brand continues to move forward and become the leading innovator in the closed toe multisport category.

With regard to our other brands, including Simple, Ahnu, and TSUBO the strategies are similar, improve the look and the quality of the product and build distribution. Specific to the Simple brand we put a greater emphasis on design, so consumers no longer have to opt for sustainability over style, which we believe will help the brand appeal to a much broader audience.

The adjustments that we make and that we have made are having an immediate impact as domestic fall bookings are up 37.6%, thanks to a more focused and commercial product line. At the same time, spring sell through has been solid at several important accounts like Zappos.com, Nordstrom, and Journey's, which is also helping drive future orders.

Equally important with inventory levels down approximately 32% from a year ago, we head into the Simple brands peak selling season in very good shape with fresh product and very little obsolescence. With the Ahnu brand, we are making good stride of getting in front of the brand’s target consumer active women in their mid-30s. Replacement in several key catalogs including Garnet Hill, Acacia, and Eddie Bauer.

Not only is this helping drive sales, but it is providing great advertising for the brand. In addition to the catalog retailers, brick and mortar stores like REI, and e-commerce sites like Zappos.com are also responding favorably to the much improved quality and the fit that the Ahnu brand is now able to deliver.

The TSUBO brand is also benefiting from better product quality and more focused collections. The spring line, while still relatively small has sold through better than expected at retail and is helping set the brand up nicely for fall, when many of the accounts that used to sell the TSUBO brand like Nordstrom and several key independents will again be carrying the line.

As we announced on our last call, thanks to a strong operating performance for the past several years, we now have the financial flexibility to pursue a sizeable acquisition, the brand with an annual sales in the $100 million to $200 million range. While we don't have anything to update today, we will continue to evaluate the opportunities that we believe would make good financial and strategic sense to the company and its shareholders.

Finally, we are pleased at the wRatings Corporation, a consumer-based equities research firm, announced today in its 2010 consumer goods rankings for the most competitive company. These rankings cover companies that manufacture products that deliver services for distribution to retail. We topped the list for mid-cap companies. This recognition provides further independent validation of our brand building and distribution strategies. If you like more on that research please go to the wRatings.com website.

With that operator, we are now ready to open the call up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question is from the line of Jeff Klinefelter with Piper Jaffray. Please go ahead.

Jeff Klinefelter - Piper Jaffray

Hi, congratulations everyone, a fantastic start to the year. Wanted to ask you a couple of questions, first on UGG. You mentioned, or I think Tom mentioned, the gross margins would be expected up for the balance of the year. A big part of that, the retail mix, but also some product margin improvement. Is that coming from sourcing improvements or sourcing leverage? Is that mix? Where are you seeing that and putting it in context with any sort of sourcing inflation that the industry might have been anticipating?

Angel Martinez

I think it is a combination of various factors Jeff. I think one of the things I mentioned is that we made an investment in PLM, which is product life cycle management software, and one of the key benefits of that going forward is that we should be able to be a lot more precise about the utilization of materials, the right materials in the right factories for the right constructions. So long-term we should see some benefit on the margins there.

The other benefit of doing that is it allows us to spend more time getting it right with the consumer, and it can allow us to compress our actual product creation cycle giving us more time to be closer to the market. We really haven't seen much impact yet on any sort of pricing increases in raw materials, although we do anticipate that there will be some of that going forward next year.

Jeff Klinefelter - Piper Jaffray

Okay, there's two other quick things. I know a lot of questions today. On your UGG, given the very successful growth and evolution of that brand in the US, how are you thinking about that differently, if you are, for the UK and Benelux, as you take that direct in the next year in terms of rollout, number of points of distribution, retail versus wholesale? Anything strategically you've picked up on that will accelerate the brand growth over there? And then just lastly on Teva, do you feel like you're taken a lot of share in that business or is it your, and Pete's impression that that category is really starting to turn around nationally?

Angel Martinez

Well, let me start with Teva, I think we're taking share. I think the brand’s authenticity and heritage as a core outdoor brand, and the fact that it is performing well, the product is compelling, certainly much more useful customers in the target end responding to the product. So, yes, I think we're taking share. I also think that the category is coming to life. I think that retailers have gotten very smart about understanding the need to make the outdoor more useful definition for people.

Everybody is working very hard to get that age-group appeal down from the mid-40s to the mid-30s and 20s. So over time I think we are just positioning very well to take advantage of new approaches in marketing by our retailers, and we want to be one of the lead brands in this new face of the outdoors.

When it comes to UGG and rolling it out around the world, not just Europe, you know, those markets benefit tremendously from the insights we get in selling the line here in the US. Obviously, new introduction of sneakers that I was mentioning, the fashion product, new innovations with fabrications and materials, all of those things allow us to be more precise in the merchandising story around the world.

That and the retail stores overseas give us a sense of what that local consumer expects from the brand. So the retail stores act as a great model for refining what the wholesale assortment needs to be as each season comes along. We become much better wholesalers because we have those retail stores.

Jeff Klinefelter - Piper Jaffray

Okay, great. Thank you. Congrats again.

Angel Martinez

Thank you Jeff.

Operator

Thank you. Our next question is from the line of Todd Slater with Lazard Capital. Please go ahead.

Todd Slater - Lazard Capital Markets

Thanks and congratulations to everyone, especially to Pete.

Angel Martinez

Yes, thank you Todd. I am sure Pete will appreciate that.

Todd Slater - Lazard Capital Markets

Well, just following on Jeff's question with respect to Teva, can you give us a sense of the profit outlook you have for this year and could the earnings growth, especially domestically, keep pace or exceed revenue growth?

Tom George

Yes, Todd this is Tom. Yes, given we do have the international distribution, we have been Benelux counter direct with Benelux, which has an operating margin improvement relative to dealing with a distributor. We are expecting some improved profitability, obviously improved profitability outlook for Teva in 2010.

Todd Slater - Lazard Capital Markets

Right, but if you exclude, that was my point about domestic. If you exclude the international, what's that look like? Are we also picking up some profit margin in that business domestically?

Tom George

Yes, we are.

Todd Slater - Lazard Capital Markets

Great. Okay, that is great. Just on the -- looking at the second quarter and the $0.25 number guidance, if we back out the international investments, the nickel or so earnings growth about 19%. That's well below the first quarter trend. So, I guess with the UGG and the Teva performing so well and I'm assuming the DTC, the direct-to-consumer likely to continue, increase in mix. Could you talk about what seems like a lot of conservatives in there, is there an Easter shift impact or something else in the gross margin or expense side that we should be aware of that we haven't factored, in addition to, the international investments?

Tom George

I think the thing to consider there is that we said on the call though the margin is up some because of some of the mix as well as being direct. With Teva there is a larger amount of SG&A we need to address this year compared to a year ago in the second quarter, one being five additional stores, net of being just traditional infrastructure relative to a year ago this time we have invested in. So that plays into what influences our guidance there right now.

Todd Slater - Lazard Capital Markets

That's pure infrastructure in the smallest revenue quarter.

Tom George

Not, pure infrastructure. Remember, we have five new stores as well now in the second quarter of 2010 relative to a year ago.

Todd Slater - Lazard Capital Markets

Got it. So those five stores all come in Q2? One in 2Q?

Tom George

Yes.

Todd Slater - Lazard Capital Markets

Okay. Terrific. Thanks very much and best of luck.

Tom George

Thanks.

Operator

Thank you. Our next question is from the line of Scott Krasik with BB&T Capital Markets. Please go ahead.

Scott Krasik - BB&T Capital Markets

Hi. Thanks for taking my question. Angel, have you gotten to the point now where you need to really start to segment what retailers get what UGG product because the line has grown so much? And could that have a beneficial impact on your margins going forward when you get there?

Angel Martinez

Well, we have always done that. Actually the process that we use in working with our retailer is more of a business management process. We are very selective as you know about which retailers carry UGG, but also in a given environment

let us say a mall with say four or five retailers carrying the brand, we are very conscious of which product works in which retail environment. Not to have everybody all in a feeding frenzy over everything we make. Obviously, there is a fairly broad cross-section of retailers that carry the classic, and carry slippers plus the fashion product isn't for everybody. The sneakers, for example, are not for everybody.

And so we have been managing this now pretty well for quite a while. Going forward I think the trend lines and the sell through at each retailer will allow us to be more intelligent about that. You know, we will able to dial in a retailers mix and assortment being very specific with their consumer and not every retailer obviously, has the same consumer target. So just in a broad-based example, our Nordstrom versus Journey’s you're going to have a very different mix in Nordstrom than you are going to have in Journey’s. And the more we learn about the Journey’s customer as distinct and separate from the Nordstrom customer, it is going to allow us to dial in that assortment in a much more precise way.

Scott Krasik - BB&T Capital Markets

Okay. So, you're doing it already. And then, the other question is on the non-footwear component of UGG's, in terms of, growing those to be a bigger part of the business.

Angel Martinez

We are very excited about that. We think that the handbag business is an important part of our accessories growth area, which we think there is a natural affinity obviously between footwear, especially boots and bags. But beyond that, we think that the tests we have been doing in outerwear have been very successful so far. And we anticipate developing that to include more than outwear, and that will include knitwear, sweaters, and as you know, we have been doing a great job through our licensee with cold weather accessories. Those have become very, very popular in the winter selling season.

Scott Krasik - BB&T Capital Markets

Has non-footwear component has that hit the railing, is it meaningful at this point?

Angel Martinez

It is still evolving, still developing. You know, really that has kind of been us wanting to make sure we got the product right. We really feel confident going into this fall that we got the product dialed in where we want it to be, and you will see an ongoing improvement from a revenue perspective in these kind of accessory non-footwear products over the next few years.

Scott Krasik - BB&T Capital Markets

Okay, thanks. Good luck, guys.

Angel Martinez

Thank you.

Operator

Thank you. Our next question is from the line of Mitch Kummetz with Robert W. Baird. Please go ahead.

Mitch Kummetz - Robert W. Baird

Yes, thanks. Let me add my congratulations. Angel, can you just give us your quick thoughts on what's happening at retail right now? To what extent are retailers chasing and how are you reacting to that? It sounds like you've got some fill-in orders on Teva in the first quarter. Are you expecting that in the second quarter? Seems like your inventory is pretty well positioned in order to accommodate that. And is the fill-in opportunity really within Teva more than the other brands and is that kind of how you would view it over the balance of the year too?

Angel Martinez

I think on the Teva business they're in good shape with the right inventory this year, and in good shape with fill-ins through the balance of the spring and going into early summer. We are also in good shape on the simple brand with some fill-in business. Ahnu and TSUBO bought their inventories very close to orders. So more limited fill-in opportunity there. We're chasing it with those two brands because we are getting some good sell throughs.

In general, the general thing I'm hearing from retailers is the improved environment. You know, a lot of people are chasing inventory, brands have become resurgent, you know, so it's important to have the right brands. The consumer has been out there. I think, just kind of got tired of not shopping, you know, I mean, American shop. This is what we do. So entertainment value being necessary shopping is the primary form. People are out there and they are looking for brands. It's pretty interesting. It has caught a lot of people by surprise because people are expecting a storm that would be you know, more intense deeper into this year. Maybe we are resurging you know, sort of a fall but we are getting good sell throughs in the spring.

Mitch Kummetz - Robert W. Baird

Got it. And then speaking of the fall, I think you mentioned on the Simple business that your pre-books there are up 30%. I don't think you gave it for UGG and Teva. I don't know that you care too. But if you could just give us a little more color in how those two businesses are setting up for the back half in terms of the wholesale orders there?

Angel Martinez

Yes, we are very satisfied with the trends that we see. You know, it's really about as I said on the -- on my prepared comments, the spread in assortment of product with UGG. So you know, really looking at the presentation of the brands of the consumer, what we find especially through our own stores is that consumers love to see the assortment, and they are willing to try the brand for a non-classic product which is, and they are very satisfied, and they come back for more.

So, you know, it's important for us to make sure that story gets translated to our wholesale customers. I'm very happy with the trend we are seeing in terms of those kinds of orders, non-classic orders. On the Simple side, we came up with a shoe called the BIO-D this year, and that's really what's -- it is that and the ecoSNEAKS are really driving the performance of the brands. So we feel you know, pretty comfortable.

The Teva side, great strength in the fall closed toe product. That's been an exceptionally powerful insight we’ve had that the consumer is ready for a new brand in outdoors. And Teva as a heritage brand seems to be filling the bill, especially with the technical product we've got. Fall looks like it is setting up pretty nicely.

Mitch Kummetz - Robert W. Baird

Okay. That's good to hear and lastly, a question for Tom. On the SG&A, your guidance is now for 26% of sales for the full year. I think coming off of Q4 you guys were seeing 25%. Given where the sales expectations are for the year, looks like you expect SG&A to be up maybe, looks like about $13 million more than what was in the guidance before. Could you tell us where that's coming from? Are you guys looking to spend a little bit more investing in the brands, just based on the strength you're seeing or is there anything else, any other bucket where you guys are looking to increase the spending?

Tom George

Mitch in terms of the guidance for the total year for SG&A, the 26%, I think that's where we were at, you know, the prior guidance we were at 26%. What drives it, you know, the SG&A year-over-year is relative to the direct distribution now in the Benelux for Teva. Now we have operating expenses there. You know, the addition of the stores, not only the ones weren’t at full-time last year but open up full-time this year plus the 10 new stores. So that, and then some more infrastructure, but for the most part it stores in international distribution that drives the SG&A year-over-year.

Mitch Kummetz - Robert W. Baird

Got it. All right. Thanks, guys, good luck.

Operator

Our next question is from Sam Poser with Sterne, Agee. Please go ahead.

Sam Poser - Sterne, Agee & Leach, Inc

Good afternoon. Can you hear me?

Tom George

It sounds like you're in the shower.

Sam Poser - Sterne, Agee & Leach, Inc

Sorry about that. How are you? A couple of questions, number one, can you break out the international, the revenue, for the quarter please?

Tom George

Yes, hang on. International sales for the quarter were $38.9 million.

Sam Poser - Sterne, Agee & Leach, Inc

Okay, great. Then with the Teva increase, how much of that can be attributed to the Benelux. I mean on sort of like how much of that increase could be attributed to the Benelux and, I guess, to France?

Tom George

Yes, approximately a third of the Teva increase is attributable to having a direct model now.

Sam Poser - Sterne, Agee & Leach, Inc

Just in those two countries?

Tom George

Well, yes. Direct model just in those two countries, right.

Sam Poser - Sterne, Agee & Leach, Inc

So, next year when you direct in the UK that theoretically could be very helpful as well? So we get some idea of how much power the conversion to these direct businesses have?

Angel Martinez

Well, you know, I think one of the things that's different from Benelux versus UK, we had a very strong distributor model, distributor operating in the Benelux with Teva doing a great job for a very long time. We did not have that in the UK. So the UK has got ways to go with the Teva brand. We know that the consumer is there. We know there is a market. We know there is great distribution. We know there is a solid outdoor industry there. So we've got some building to do, but we don't have as developed as Teva business to begin with in the UK that we had in Benelux.

Sam Poser - Sterne, Agee & Leach, Inc

But when we look at, say, the UGG business which is very well developed in the Benelux and in the UK, we could expect to see that kind of acceleration or that kind of impact?

Angel Martinez

You know, obviously my -- we're pretty aggressive in how we want to grow the business. Yes, there is a market, there are great distributors, I mean there is great retailers. It's a competitive environment, probably a bit more competitive than the Benelux was. You know, brands, outdoor brands being highly evolved there. So, -- but yes we're certainly not being squeamish about setting aggressive plans.

Sam Poser - Sterne, Agee & Leach, Inc

And the timetable for the new, for the stores would be, I guess, September, October like usual in the second, in the third quarter really?

Angel Martinez

We like to get them open in that quarter, yes.

Sam Poser - Sterne, Agee & Leach, Inc

And you're just not talking about the cities as of yet, I gather?

Angel Martinez

No, we're still in the final stages of these negotiations. I would rather not talk about that yet.

Sam Poser - Sterne, Agee & Leach, Inc

Okay. One last thing. Tom, when we're looking at the SG&A, I mean, what's the balance? Is really Q2 going to be the highest percentage of SG&A of any of the quarters, as we look at it?

Tom George

Yes. You know, Sam -- like we indicated with the guidance, with the revenues for the second quarter historically, the lowest revenue quarter there with a large amount of fixed overhead, fixed SG&A we have in place that's going to drive the highest SG&A as a percentage of sales.

Sam Poser - Sterne, Agee & Leach, Inc

And I mean with that number, would pretty much almost be in line with the first quarter, I would guess? In actual dollars?

Tom George

You know, pretty reasonable there. You know, we -- pretty reasonable to assume that.

Sam Poser - Sterne, Agee & Leach, Inc

All right. Well continued success. Thank you.

Angel Martinez

Thanks Sam.

Tom George

Thanks.

Operator

Thank you. Our next question is from Chris Svezia with Susquehanna Financial. Please go ahead.

Chris Svezia - Susquehanna Financial Group

Good afternoon everyone, and congratulations. I guess just on the Teva business for a moment. Angel, when you think about the improvement that you've seen and kind of right sizing the business, improving inventories, and you've mentioned, in the past there's always been an REI businesses has really been talked about. It's obviously one of the key retailers. You're obviously talking about some opportunities here at Dick's and what's going on there, and obviously mentioned Nordstrom as well. I guess, as you think about that business this year, can you just talk about door growth relative to just increasing penetration in existing doors? Just kind of how we should be looking at that?

Angel Martinez

Well, I think you are going to see door growth from all of those retailers with the brand performing the way it has been. You have to look at last year as was a true test year for Teva, even though the brand have been, you know, those have been our customers for a long time. We were down to what you might call a pilot flame, in terms of you know, growth. We needed to have some product sold through solid double digits, so we could have more open-to-buy, so we can get better foundation which is what we started this year with, and the performance of spring is yielding more door growth as we look into fall for the new fall product as well as you know, for spring ’11.

So that's all great. Then there are other retailers like TSA, like Sports Authority where you know, they've been very -- they have been a good customer for a long time, but now we're starting to see great performance and sell through especially on the Mush product, and that's opening the door for a variety of other sandal opportunities, as well as the closed toe. And keep in mind we've also got closed toe for spring. So it isn't just closed toe for fall that is helping us. It's close toe for spring. I think it made a big difference this year because suddenly on a rainy day we are not out of business in the spring and that's important. We have product that will sell you know, in any environment.

Chris Svezia - Susquehanna Financial Group

I'm not sure about this. But is Bass Pro, Cabela's, and Gander Mountain, places like, that play into --

Angel Martinez

That's right. Those are good growth opportunities for us. We've had excellent conversation with them and a lot of excitement over the direction of the brand.

Chris Svezia - Susquehanna Financial Group

Okay, all right. And my other question is on the eCommerce business. I know first half, sort of until you got until about midway into the third quarter last year it was a tough business for various reasons. I'm just kind of curious, just remind us exactly what changes you've made to that business on the eCommerce platform. And you know you saw some nice growth here. Can we just extrapolate that that's pretty sustainable here at this point?

Zohar Ziv

Yes, Chris, I think this one, this is Zohar.

Chris Svezia - Susquehanna Financial Group

Hi, Zohar.

Zohar Ziv

Hi, some of the things we've done, we have really, you know, focused into increasing both the visitor and the conversion rates into the site. For example we brought a new you know, marketing director and focused on the business to really how we drive more traffic to the site in conversion and that you know, playing a nice results according.

Chris Svezia - Susquehanna Financial Group

Okay, all right, thank you very much and best of luck.

Angel Martinez

Thank you.

Operator

Thank you. Our next question is from the line of Andrew Burns with Thomas Weisel. Please go ahead.

Andrew Burns - Thomas Weisel Partners

Hi, this is Andrew in for Jim Duffy [ph]. You mentioned UGG sneakers as an opportunity for back-to-school. Could you give us some color on the growth of this product line, in terms of, SKU's and distribution. It seems like there's opportunity to put the product in a lot of doors in fairly short order?

Angel Martinez

Well, I mean we are not going to put the sneakers in place as we wouldn't put other products. So it's not like you're going to see the sneakers in athletic specialty stores or necessarily, you know, outside of our normal distribution for UGG. What it gives us however, is unique and distinctive sneaker product that we haven't had in the past. You might, I mean, they're almost like dress sneakers, I guess you would say, and when you look at the price points that people are getting for sneakers, $150 to $160, you know, a mixed price UGG point very, very reasonable, $130, $120.

We are -- look we have a high top, we've got a low top, we've got a slip on. There is, I think, in the men's three SKUs, I can't recall, I'm sorry how many SKUs we have in the women. A lot of color. It's just a fun new, very young, you know, statement that we are making in a quality way. So sell throughs never lie. So we are really happy with that.

Andrew Burns - Thomas Weisel Partners

Great, and last call you mentioned switching to a wholesale model versus distributor, in UK and Benelux, would have about a $40 million benefit to sales in 2011. With the improving back drop and your current business momentum, is it fair to say that the number might be larger looking at it here a few months later?

Tom George

Well, that would -- you know, we are not given 2011 guidance at this point in time but you know, what that $40 million number was sort of an apples and apples comparison of the lift we would get relative to our expectations at that point in time. So it is a function of what volume of business we do in 2011. So we’ll just have to see how that shapes out as time goes on.

Andrew Burns - Thomas Weisel Partners

Thanks, and last question can you break out the Simple brand revenue for the first quarter?

Angel Martinez

We are right now, you know, we sort of moved towards all the other brands other than Teva and UGG, other brands that we just do that together at this point in time.

Andrew Burns - Thomas Weisel Partners

Great. Thank you.

Operator

Our next question is from the line of Howard Tubin with RBC Capital. Please go ahead.

Howard Tubin - RBC Capital Markets

Thanks guys. Great quarter. Just a question on inventory, you've done a great job managing inventories. They're nice and lean. How should we think of inventory at the end of 2Q? Will it be up kind of in the 4% range again or should we expect it to increase a little bit more than that?

Angel Martinez

I think inventories that the end of the second quarter could be you know, could be, you know, in the ballpark to where they ended up relative to the comparison from the first or may be higher. Just have to see you know, how things go. As we mentioned on the call we are, really there's been a great concerted effort. We're seeing a lot of benefits of bringing in inventory closer to when we actually sell it to our customers. So, and I think net-net you know, it could be a similar comparison or maybe even slightly up.

Howard Tubin - RBC Capital Markets

Got it, thanks. Can you just remind us for the fall season, is your pricing pretty consistent this fall versus last fall?

Angel Martinez

Yes.

Howard Tubin - RBC Capital Markets

Great, thanks.

Operator

Our next question is from the line of Omar Saad with Credit Suisse. Please go ahead. I'm sorry Mr. Saad disconnected. Our final question is from the line of Chi Lee with Morgan Stanley. Please go ahead.

Chi Lee - Morgan Stanley

Hi, good afternoon guys and congratulations, and I guess I just made it. Can we go back to the first quarter gross margin, because I understand qualitatively what drove the expansion, but can you help us better understand what the magnitude of each of those drivers were, between the direct to consumer mix shift, perhaps some organic gross margin improvement in the domestic wholesale business? Just trying to get a better understanding of that 600 basis point improvement.

Tom George

Right. This is Tom. I will give you some color on that. There were -- there was, part of it was relative to having direct distribution with Teva like you said part of it was the direct mix, and then there was improved margins and, you know, it splits relatively you know, equally. There is little bit, you know, let's say 1% to 2%, maybe relative to Teva and the direct mix is about 2% and then improved wholesale product margins is maybe too a little bit higher than that. So that’s sort of the split what drives that.

Chi Lee - Morgan Stanley

Okay, that's really helpful and I guess Tom, question for you just on the accounts receivables provisions. I mean, it seems this point last year you guys were still taking a lot of provisions for the receivables. Have you seen that trend reverse? In other words, are you starting to see somewhat of an earnings tail wind, as you perhaps, don't need to take those provisions and may even be reversing some of those at this point?

Tom George

Yes, I think you're correct. I mean, we've got you know, lot of improvement in the quality of our receivable base relative to a year ago. So we have been able to you know, cut back on some of our provisioning for bad debts.

Chi Lee - Morgan Stanley

Okay, great, and then just lastly, I wanted to clarify. Angel, I know you talked about certainly strengthening fall bookings for UGG, but I think last call you had mentioned that you were expecting domestic wholesale business to potentially be up in the mid single-digit range for UGG. Would you care to update us on where you think that business could be this year, given that you increased the guidance for the overall UGG business? Thanks.

Angel Martinez

Hi, we haven't broken out what we expect by brand, but I like the trends that we are seeing and I'd stay consistent with what I said last time. We anticipate because of new product introductions the ongoing momentum of boots in the marketplace and overall the amount of spread and assortment we’ve gotten at retail and ongoing, you know, growth in UGG business consistent with where we've been. You know, I don't really want to break it out anymore than that.

Chi Lee - Morgan Stanley

Okay, thank you.

Angel Martinez

Thanks.

Operator

Thank you. I will then turn the call back over to management for any closing comments.

Angel Martinez

Well, again I want to thank you all for participating on the call. I want to send a note of congratulations and appreciation to our worldwide Deckers organization. I think you're seeing the results of an ongoing commitment to developing our team and increasing the amount of talent we bring into the organization and being intelligent about the investments we make to grow our business going forward. So, we look forward to the second quarter call. Thank you all very much.

Operator

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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