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Deckers Outdoor Corp. (NYSE:DECK)

Q3 2010 Earnings Call

October 28, 2010 4:30 pm ET

Executives

Angel Martinez - President, Chairman and CEO

Tom George - CFO

Zohar Ziv - COO

Analysts

Sam Poser - Sterne, Agee

Todd Slater - Lazard Capital

Shawn Nodden - Piper Jaffray

Chris Svezia - Susquehanna Financial Group

Steven Gregory - Mandalay Research

Scott Krasik - BB&T

Omar Saad - Credit Suisse Group

Jim Duffy - Stifel Nicolaus

Bill Fazilem - Titan Capital Management

John Hurshtrip - Sheffield Management

Operator

Good afternoon ladies and gentleman and thank you for standing by. Welcome to the Deckers Outdoor Corporation Third 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. Instructions will be provided at that time for you to queue up the questions. (Operator Instructions) I would like to remind everyone that this conference call is being recorded.

Before we begin, I would also like to remind everyone of the company’s Safe Harbor 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 the 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, general economic conditions, 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 will now turn the conference over to President, Chairman, and Chief Executive Officer, Angel Martinez. Please go ahead, sir.

Angel Martinez

Thank you everyone for joining us to discuss our third quarter 2010 financial results. With me on today’s call are Chief Operating Officer, Zohar Ziv and Chief Financial Officer, Tom George. I will begin with the review of our recent performance including the key drivers of the business. Then Tom will review our financials in greater detail and outline our upwardly revised guidance for the full year. Then I will return with some brief closing comments about the future plans and strategies.

Our third quarter was better than expected across the broad, with sales, gross margin and earning all coming in ahead of projections. The upside was primarily driven by better than expected sell through of the UGG fall line and our company-owned retail stores coupled with higher than anticipated international demand for the brand. Teva sales also contributed nicely with growth across all channels and regions leading to the brand’s strongest third quarter in several years

From a product prospective, our business continues to diversify. The UGG brand’s fall collection is the most complete line of footwear we have ever developed including classic, knit, cold weather, casual and fashion boots along with a broad assortment of slippers, wood bottom clogs, and sneakers.

I encourage everyone to stop by one of our stores including our newest locations in Miami, Georgetown, and New York on Madison Avenue, or visit our e-commerce site to get a full appreciation of the breadth and depth of this season’s line. You will find that we have products, which can be worn for almost any occasion in and around the house, to work, in warm or cold weather, and out for the evening, and this has allowed us to capture greater share of the women’s market.

Consumers who were introduced to the brand through their first pair of classics follow that up with a pair of slippers. Those same consumers are now buying our cold weather product and replacing their traditional calf high leather boots with a pair from our fashion collection.

Looking at the fall line, you get a sense of brand diversity and broadening appeal to an increasingly sophisticated consumer audience. As a matter of fact, our market research indicates that 77% of UGG brand female consumers are 18 to 54 years old. Of that 47% are 18 to 34, and 30% are 35 to 54.

New for this year is our collaboration with Jimmy Choo on a special line of limited edited boots. These just began selling last week at selected retailers or UGG Australia concept stores and our web site and Jimmie Choo’s stores worldwide and their web site. Jimmy Choo sold the collection into their distribution so, it is being carried by high end retailers like Bergdorf Goodman, [Sax Worth Avenue], Nordstrom Parris and Galeries Lafayett in Paris in addition to [Salon Independence] all over the world. You may have seen the global ad campaign around this collection including prints in fall and fashion magazine in the US, Italy, UK and Japan as well as billboards and window displays in Paris, New York, London, Japan, San Francisco, and Chicago.

This partnership with Jimmy Choo further validates the UGG brand of the category creator as we are seeing more and more premium brands like Burberry and Channel utilizing sheep skin in their footwear and a pair of collections.

Looking at our distribution channels compared to this time last year, we have expanded our presence across our national base of better department stores, specialty chains, and key independents. As we previously detailed, we have increased our domestic shop-in-shops to approximately 100, up from 74 last fall.

Our retail business continued to experience strong growth. Same store sales for the quarter were up 17.9% for those stores that were open for the full three-month period ending September 30, 2009 and 2010 and our new stores continue to perform at high levels with strong four-wall contributions and quick paybacks.

Teva’s Q3 business was also much more diversified than previous years. Thanks for the growth and evolution of the brand’s open and closed toe footwear. Our collection of light hikers and technical sandals helped fuel our strongest spring season in more than a decade and have generated positive moment and was moving into the second half of the year. For fall, we supplemented our closed toe offering with additional multi-sport products at a $100 plus price points that are selling very well.

Our women’s lifestyle products most notably boots are also off to a very good start at retail. What we are seeing speaks to the success that we have had in targeting a younger, more active consumer and repositioning to have a brand as a year round brand.

Our overseas business continues to gain pace. In Europe, the UGG brand is experiencing its best season ever. Our distributors in UK and Benelux are supporting very diverse assortments for the fall including greater percentage of new styles. Based on the feedback we are receiving, the response from the consumers have been very favorable. We are also seeing this trend in our UK retail stores where the sales data indicate that the consumers there are buying all styles of the brand’s new looks.

We are also experiencing similar results with the UGG brand in Japan. In switching to a wholesale model at the start of 2009, we got an experience team that is selectively adding new retailers, improving productivity and existing accounts and delivering an enhanced brand message to consumers. Given the strong performance of other luxury brands in Japan, we believe that we will continue to grow the UGG business in Japan from where it is today.

In China, we recently opened three new UGG retail stores with two of this quarter in Shanghai at Plaza 66 and Hong Kong Place and the other in late June in Shenyang Place 66. We are also very encouraged by consumer’s reaction to our stores and product line and were highly optimistic about the UGG brand future in the China market.

Tom will now go through the financial in more details. Tom?

Tom George

In the third quarter of 2010, net sales increased 21.7% to $277.9 million compared to $228.4 million in the third quarter of last year. Net sales of UGG products increased 20.2% to $255.8 million versus $212.8 million in the third quarter last year. Net sales of Teva products increased 51.7% to $13.7 million in the third quarter compared to $9 million in the same period of 2009. Combined net sales to the companies other brands increased 26.5% to $8.4 million in the third quarter of 2010 compared to $6.6 million a year ago.

Included in these numbers of global retail store sales of $20.2 million, up 63.3% from $12.3 million in the third quarter of 2009, driven by eight new stores and a same store sales increases to 17.9%, for those stores that were opened for the full three-month period end in September 30, 2009 and 2010.

Sales for our e-commerce business, which are included in the brand sales numbers as well increased to 3.8% to $8.7 million in the third quarter, $8.4 million in the prior year. The e-commerce business faced difficult comparison to 2009 is prior sales included larger closeouts for Teva and other brands.

Also included in the brand sales numbers, domestic sales brands increased 14.2% to $204.7 million compared to $179 million in the third quarter last year. International sale increased 48.2% to $73.2 million compared to $49.4 million in Q3 2009. International sales were 26.3% of total sales up from 21.6% last year.

Gross margin for the current quarter improved 420 basis points to 47.1% compared to 42.9% in the third quarter of last year. This increase was driven by an increased mix to retail sales, direct distribution for the Teva brand in the Benelux, duty refunds, reduced closed out revenue and overall improved margins for all brands.

Total SG&A expense for the quarter was $64.6 million or 23.3% of net sales compared to $44.9 million or 19.6% of net sales a year ago. SG&A increased primarily due to increases in payroll expenses due to costs associated with eight new retail stores that were not open during the third quarter last year, operating expenses for our direct Teva operation in Benelux international distribution startup expenses, as well as additional increases in variable expenses for the increased sales.

Operating income for the quarter was $66.3 million or 23.9% sales compared to operating income of $53.1 million or 23.2% of sales last year. The improved operating income was attributable to the aforementioned increases in sales and gross margins.

Net income for the third quarter of 2010 increased almost 25% of $42.1 million compared to net income of $33.8 million in the third quarter of 2009 and diluted earnings per share increased 24.4% to $1.7 versus diluted earnings per share of $0.86 in the third quarter of last year. Please note that all share and diluted earnings per share amount discussed in the call including the amounts for prior period taken into account 3 for 1 stock split that was distributed in July 2010.

Now turning to the balance sheet, at September 30, 2010, our overall inventories increased 5% to $197.3 million versus $187.8 million a year ago. By division, UGG inventory rose 3.1% to $180.3 million, Teva inventory increased 61.5% to $11.2 million and our brands inventory decreased by $0.1 million. The increase in the UGG and Teva brands inventory was required to support our expected increase in Q4 sales.

In addition at September 30, 2010, we had cash and cash equivalence totalling $250.5 million up almost 100% compared to cash and cash equivalence and short-term investments of $125.6 million a year ago. Accounts receivable at September 30, 2010 were $142.2 million compared to $112.9 million at September 30, 2009. During the quarter, we repurchased approximately 170,000 shares of our stock for $7.4 million at an average price of 43.89 per share. We have approximately 20 million remaining authorized in our current share repurchase program.

Moving on to our outlook. Based on our better than expected third quarter results, we are raising our 2010 guidance. We now expect 2010 revenues to increase approximately 16% over 2009 levels up from our previous guidance of approximately 14%. For the full year, we now expect UGG brand sales to increase by approximately 15%, up from our previous expectation of 13% and Teva sales to increase approximately 30%, up from our previous expectation for growth in the high 20% range. This will bring Teva sales to over $100 million for the first time ever.

Our other brands combined are still expected the increase of approximately 15%, consistent with the previous guidance of 15%. We currently expect diluted earnings per share to increase approximately 22% over a split adjusted ‘09 non-GAAP diluted earnings per share of $2.98 per share, which excluded a noncash impairment on intangible assets of $1 million as discussed in our associated earnings release.

This is up from our previous guidance of approximately 16% growth. Our forecast is based on a full year gross margin of approximately 49% and SG&A as a percentage sales of approximately 25%. As a reminder in preparation for the change from a distributor model to wholesale model for the UGG, Teva and Simple brands in the UK and the UGG and Simple brands in the Benelux region in 2011 as well as Teva brand Benelux and France transition this year, we will incur additional expenses in 2010 for the new initiative to establish the infrastructure necessary to support broader wholesale operations beginning in 2011.

Also because of these transitions approximately $10 million of sales will shift to 2011 under a wholesale model that would have previously been recognized at international sales in November and December of 2010 under the former distributing model.

In total, these incremental expenses in the profit shift of $8 million will have an estimated diluted earnings per share impact of $0.13 of which approximately 65% is a one time impact.

Excluding these costs, we expect diluted earnings per share growth to 26% over 2009 levels. Furthermore, due to the impact of our international pretax income from the aforementioned expenses in 2010, our effective tax rate is expected to increase slightly to 36.8% from 36.2% in 2009.

Our capital expenditures in 2010 are expected to a total approximately $25 million, a $10 million increase from our 2009 level to $15 million. This has driven mainly by the build out a new retail stores as well as the new e-commerce platform and PLM software.

For the fourth quarter 2010, we still expect both revenues and diluted earnings per share to increase approximately 88% compared to fourth quarter ‘09 levels. Fourth quarter guidance includes approximately $5 million or $0.08 per diluted share of incremental investments associated with the international distribution transition as well as the aforementioned higher level to fix overhead.

I now turn the call back to Angel for some closing comments.

Angel Martinez

There is a lot to be exited about as we approach the holiday selling season and look forward the next year. We believe that we are developing great products and compelling lifestyle messaging to create strong global momentum from the UGG brand and now the Teva as well. We are seeing in our markets worldwide retailers are hungry for our brands. Zohar and I recently returned from Asia and it was clear during our visit to Japan that consumers have developed a true affinity for the UGG brand.

Our new team has done a great job of re-igniting interest in the brand and they are making great headway building the right wholesale distribution and searching out potential new store locations. We saw similar trends in China, which is now the second largest luxury market, thanks to a growing population of consumers who want the brand name like UGG and Teva, now cheap imitations are knock offs. The sell through results from our four UGG stores in China speaks to this new wave of demand, which we believe will continue to grow for sometime.

As I mentioned earlier, our European business is doing very well as awareness of our expanded product assortment continues to spread across the continent. We are very excited about bringing all our distribution in the UK and Benelux in-house and we’re confident that the UGG and Teva brands are ideally positioned to attract new consumers in these region as well as other key countries suggest France, Germany, Russia and Italy to name a few.

Here in the US, newness is driving our business and so we believe that this will continue in spring 2011 as we further diversity the UGG line with additional non-boot style such as sneaker and sandals. Next month, we will begin pre-lining fall 2011 with our major accounts and we’re confident that we can build on the positive story line from this season. This is also true for the Teva brand as a light hikers and multi-sport collection become more meaningful to the spring line. In fact, more multi sport product is sold in spring versus fall. There is a true opportunity for us to increase our share of the key outdoor category.

For 2011, the financial benefit we expect from our upcoming conversion to subsidiary models in Europe is very timely. In that for 2011, we now anticipate input cost increases will be toward the high end of the 5 to 10% range that we discussed in our second quarter callback in July due mainly to rise in commodity prices.

In addition, based on the global trends our businesses are experiencing and our growing cash position, we believe 2011 is the opportunity time to make select strategic investments in our business that will accelerate market share gains in 2012 and beyond. Areas that we are looking at include an accelerated retail expansion, increasing the number of annual store openings beyond the nine planned additions that we have this year. New marketing and sales initiatives to accelerate the Teva brand’s growth and increasing awareness for our TSUBO brand.

On a larger scale, we believe there are significant growth opportunities to the UGG men’s line, and our recent market research for UGG product indicates that we still has significant growth opportunities with women. Therefore, we plan to increase our investment in UGG brand to bring our brand’s spend as a percentage of sales up to be more in line with premium global brands. This should help us capitalize on the global opportunities we believe this for the UGG brand in both men’s and women’s category.

Lastly, we will be investing in additional advertising and point of sale materials to support our transition of the wholesale sales in the UK and Benelux. We are still in the planning process for the next year and continue to evaluate the most effective ways to deploy our capital. We will lay out our investments and the benefits when we discuss our 2011 guidance in our next call in February 2011.

In addition, we continue to evaluate potential acquisition opportunities and we remained very optimistic about the long-term potential of the UGG and, Teva brands and are becoming more excited about the prospects of the Simple, Tsubo and Ahnu brand. Everyone at Deckers is energized about the business, and our global organization is focused on successfully executing our growth strategies to return significant long-term value to our shareholders.

Operator, we are now ready to open the call up for questions.

Question-and-Answer Session

Operator

We will now be conducting a question-and-answer session. We ask that you limit questions to one and one follow up to accommodate as many questions as possible. If we have time, we will repoll additional questions. (Operator Instructions).

Our first question come from comes from Sam Poser from Sterne, Agee.

Sam Poser - Sterne, Agee

Can you just give us a breakout of the operating income by segments just to help us?

Tom George

Yes, Sam, I can do that for you. We had strong operating income for the quarter, so UGG is obviously the biggest driver there and then Teva and other brands are lower numbers more at the break even kind of level for the third quarter in the retail stores. Keep in mind on the retail stores, we charge them you know cost of goods sold at wholesale. They have lower operating margins compared to total vertical margin when you include the brand margin, which is included in UGG.

Sam Poser - Sterne, Agee

Do you have the number or we have to wait for the queue?

Tom George

I will go ahead and so for UGG wholesale which includes the brand margin on the retail store was approximately $96 million, Teva and the other brands is close to a break-even, e-commerce was approximately $1 million of operating income, retail stores close to $2 million, and then there is an unallocated corporate type overhead cost that go the other direction of approximately $30 million and $66 million of operating income.

Sam Poser - Sterne, Agee

Angel, when you are looking at next year, I mean can you give us some read through as to you talked about your additional investments, can you give us some idea of how you are looking at the impact to gross margin next year with those with the Benelux and UK and France switching over?

Angel Martinez

We anticipate gross margin remain consistent with what they’ve been. Our fundamental focus is to drive the business in those markets where we feel we have market share gain opportunities. Certainly in UK and Benelux where we put together very strong sales force, we have established the brand across a wholesale spectrum as well as our retail operations.

It is to that point now where the brand would benefit from more aggressive competitive approach to the market for us meaning that more rollout of our shop-and-shop program, more spread and assortment of across wholesale channels, we’ll be developing our e-commerce platform to really grow up to the market and we anticipate as we roll forward that the Benelux will be moving in similar directions.

Operator

Our next question comes from Todd Slater from Lazard Capital.

Todd Slater - Lazard Capital

It sounds like you are going after the retail store opportunity even outside of the US maybe more aggressive than US. I am just wondering if you could talk a little bit about how that strategy is now evolving, you’ve been into it for several years both inside and outside of the US? The other question was, if you could talk about where you stand on evolving the UGG brand into more of a lifestyle brand in terms of apparel and accessories and licensing and all the other parts of the equation there? Thanks.

Angel Martinez

Todd, as far as retail goes, it is a very difficult thing to ignore the consumer’s love for the brand when they are exposed to the total breadth and assortment of the brand and in an environment that reflects the brand vision. We have been seeing that as we have been refining our approach around the world. As I have mentioned, Zohar and I were just in Asia and compared to what we see in Europe, we see the same thing happening in Asia with consumers responding in exactly the same way.

The opportunity that exists around the world for us to solidify the category leadership of is very important and one that retail does better than anything else. Particularly in markets like Asia rather like China was there is no wholesale business. Brands are built on a retail foundation and so for us to dawdle too slowly into that market, it puts at risk the category of leadership opportunity that the brand is known for and the brand has established.

We are going to keep moving on that front and will move aggressively for us. It doesn’t mean we’re just not going to open retail doors willy nilly but we take this seriously. I have said from day one that our stores need to make money; they are not marketing expenses, and we are running very profitable stores.

When it comes to the apparel and accessories, we have been refining that approach. As you know, we’ve had cold weather accessories through our licensees at hats and gloves and scarves. That is doing very, very well. We have now begun the process of developing our own handbags and our own outerwear. By the way, we are doing knitwear for the fall as well. That business is very important as we round out a retail assortment.

It is critical to have a complete brand story at retail. We are now developing to a base number of stores that allow us to be small runs of outwear, small runs of knitwear, small runs of handbag, and that creates a well rounded assortment of retail, which when our wholesale customers see that, it creates demand for that product in the wholesale environment. We are building it, in that sense, very methodically obviously tying in the shop-and-shops as we have developed them around the curious retailers as well as the Internet. That is really the approach we take.

Todd Slater - Lazard Capital

You have got some great Jimmy Choo windows here in the flagship Saks store in New York.

Angel Martinez

They are beautiful. Thank you.

Operator

Our next questions comes from Shawn Nodden from Piper Jaffray.

Shawn Nodden - Piper Jaffray

On the gross margin front, Tom, you gave us some of the breakdowns of the gross margin improvement of 420 basis points. Just wondering if you could codify some of those numbers for us? Secondly, obviously talking about sourcing costs being toward the higher end of that 5% to 10% range, but Angel, you mentioned you were looking to hold gross margins relatively consistent to this year for next year. That’s kind of the goal right now it sounded like. Just wondering how that’s going to work. Should we expect a combination of potential ASP or mix between retail and international? Just how should we think about that for the next five quarters here or next year?

Tom George

This is Tom. I will go ahead and respond to the 2009 and 2010 comparison. We are up 420 basis point. The lion’s share of that was really almost 200 basis points. That was just improved initial margins on the UGG brand, especially on the UGG brand as well as the other brands including Teva and some of the other items that I mentioned reduced closeouts and marked downs was about 40 basis point improvement year-over-year. We had a small amount rather residual amount that duty drawback, duty refund that only about 30 basis points, so higher content at retail. Retail sales this year compared to a year ago at about 50 basis points and the fact that we’re direct in Europe with Teva it’s a smaller Teva quarter but that is about 10 to 20 basis points of improvement.

Zohar Ziv

John, this is Zohar. As regard to your question about product cost and how we are going to maintain our gross profit margins and as we indicated that increase of the cost is really coming from the commodities. We are going to be on the top range of the 5-10%. How we are planning to hold our margins is the combination of both increasing prices more appropriately and also getting the benefit of the conversion. They are international distribution to the subsidiary and moving more international, and also combination of going directly and increasing our retail operation.

Shawn Nodden - Piper Jaffray

Just on the marketing maybe you just elaborate a little bit more on some of the things that you could potentially be embarking on in terms of new marking initiatives on particular demographics you may be going after more aggressively? Any way you could quantify the amounts of that additional marketing spend that you could potentially see next year?

Angel Martinez

Yes, for example, I mentioned the female consumers and 77% of them reports between the ages of 18 and 54. There is a very large percentage of population that we call prospect. These are people who have expressed an interest and an affinity for the brand and have just not have the exposure to it or not had the opportunity to purchase it having the purchase intent. That is an opportunity for us to add to the following we have for the brand in the core audience of female consumer.

The men’s market is the market that we feel we have a very good opportunity in given the success we’ve had traditionally with cold weather products and our success with slippers and recent success with some casual products we’ve made in sneakers.

From a brand perspective, if you really sort of look at us historically the UGG brand has spent about 2 to 2.5% of sales on marketing. Other brands of this caliber, for example, a Ralph Lauren, brands that you know world wide or very successful lifestyle brands and fashion brands spend 3.5 to 4%. The delta between the 2% and the 4% is an opportunity for us to very selectively and very methodically put marketing dollar at work to grow our brand franchise and solidify a larger consumer share. You’ll see us doing that. You’ll see a mix of marketing activities from social networking base to more conventional media to certainly in-store presence and a variety of things like that.

Angel Martinez

(inaudible) time is still coming together as you know, and we will be able to talk more about that in the February call.

Lastly, sounds like Teva, lot of gains being made there; it sounds very promising. Can you remind us just how big you think that business could ultimately be just based on what your expectation is right now and when you could hope to achieve your long-term goals or near long-term goals with that brand? Thanks

Angel Martinez

Sure. It is not unreasonable to see the Teva brand doubling size over the next few years, particularly with the momentum that we’re gaining outside the United States. The brand is actually very famous and authentic in Asia especially in China. We are really just scratching the surface of what we could do in China.

Without getting too far out on the horizon, if you look at a Teva brand of $100 million, could you see a $200 million Teva brand in the next three or four years, it is very, very reasonable, it is very durable and now that the product line comes together as a year round brand, male and female and kids that makes that potential much more realistic and everybody’s pretty excited about that.

Operator

Our next question comes from Chris Svezia from Susquehanna Financial Group.

Chris Svezia - Susquehanna Financial Group

First, I just want to go back to the input cost question, high end to the 5 to 10% increase. Everything is what you guys are doing with regards to sourcing in China and moving more inland, something you have done already and obviously looking in to Vietnam. How much of that potentially offsets that or mitigates that pricing pressure to a degree? I am just trying to get you sense there and can you just give me an idea how much is Vietnamese sourcing versus sourcing in mainland China?

Angel Martinez

Chris, the main impact for the increase of the cost towards the upper end of the five to the ten is really from the commodity which is really the sheepskin for us. As you said, we have moved the operation from southern China to northern China to Vietnam. You do get some benefits but the driving force was really the commodity cost.

Vietnam, even the pricing is a little but lower than China. What you do get is the productivity is lower. You are not getting a significant benefit but what you are getting is your holding increases because of the pricing crisis in China.

Also you are getting a stable labor force where the challenge in southern China has been the labor force with the migrant type of lever force. In Vietnam, the people live around the factories.

Tom George

One thing Chris that we refuse to do, we won’t do is to lower the quality of the sheepskin that we select for our production. Almost without exception, you will see the people doing a knock off brand and obviously the counterfeit folks they’re buying the lower they reports buying the lower end of the sheep skin available and probably getting that a little bit cheaper price than what we were paying but we just refused to go there. We think our customer deserves a lot more than that.

Chris Svezia - Susquehanna Financial Group

I’m curious, two questions quickly for you, Angel. Your thoughts about this holiday in terms of any -- obviously, you were off to a good start. It seems like you made some comment about you’ve seen some incremental acceleration in the business and sell through as you’ve go into the fourth quarter. It seems like you feel very confident about holiday and how it will unfold.

Secondarily, any thoughts about pre-books for spring. Obviously, you have that put to bed it seems at this point. Can you give color or commentary on what you’re seeing? Obviously, Teva is pretty strong. I would assume you’re pretty happy with what you’re seeing there. Any thoughts about how the UGG pre-book looks for spring thus far? Any color you can add to that would be certainly helpful.

Angel Martinez

It is obviously difficult to talk about the spring at this point. Put it this way, we are not disappointed. We feel that the brand memorandum continues across all channels for distribution and there has been a lot of excitement as we have seen it for the new line. A lot of excitement, I am sure, will also merge for the follow line that will begin queue line in the next three to four weeks.

Operator

Our next question comes from Chi Lee from Morgan Stanley Smith Barney.

Steven Gregory - Mandalay Research

Actually this is Steven Gregory of Mandalay Research. Couple of things, you guys mentioned that e-commerce sales increased 3.8% $8.7 million but is kind of due to the last year close out. Can you provide some color on the call today? What is your e-commerce vision going forward for next couple of years and how do you plan to get there, initially with the relaunch of your platform?

Angel Martinez

Can you clarify that question a little bit please?

Steven Gregory - Mandalay Research

What is your e-commerce vision going forward? You are re launching in a different sites doing a new platform. What is your e-commerce going forward and how you plan to expand your sales online?

Angel Martinez

One of the things we’re seeing is that e-commerce were they may have started out of the selling vehicle, if you will. In other words, brands almost by default found themselves developing an e-commerce platform just to do complete a transaction perhaps enhance some customer service that consumer is going to make it easier to get to that.

We think now that e-commerce is an intrinsic part of the brand experience. We feel that e-commerce is by some consumers the way they educate themselves about products and then they of to a retail environment or in many ways e-commerce completes a relationship with consumers. They feel that they are being invited in to the brand itself and are able to have a special relationship with the brand.

E-commerce is evolving as a very core component of the marketing strategy. Social networking is another core component of the marketing strategy. When all of it is looked at you cannot separate what is happening at retail environment with a shop-and-shop environment with an e-commerce, the social network environment and the media environment.

Our platform what we are developing is going to allow that kind of flexibility, that kind of technical capability to allow a consistent message and a timely message almost a real time message for consumers who value the brand and want to be a part of the brand experience. Obviously, that is not easy but that’s the future. Certainly, the future of marketing and certainly the future of brand developing.

Steven Gregory - Mandalay Research

Then a follow-up to that. What are you guys doing to in turn bring more people to the site? Obviously, social networking etc. How are you going about capturing new customers? Are you building any type of apps for the mobile phones to allow customers to download to their cell phones, allow them to purchase products on your website?

Angel Martinez

Yes, we’re looking at all of those things. Right now, if you look at the fan base. UGG has 440,000 Facebook fans, which is a crazy number with especially when you consider that we really have not done much to enhance that list building capacity or fan building capacity. We have so many fans coming to the brand just out of enthusiasm. What we do with those fans and how we react with them, that’s what is emerging. I wish I could be more specific than that. Those plans of developing and we’re doing quite a bit of research right now and we have employed very capable outside resources to help us refine this strategy.

By the way, it’s a moving target. It is something at the emerging as we speak with new platforms like the iPad, with the new technologies that allow from a barcode scanning and instant messaging on your iPhone, on and on. It is something you must get plugged in to and stay on top of and that’s what we are doing.

Zohar Ziv

This is Zohar. As a follow-up in addition to t very social marketing method are there that we are already doing and using outside consultant to help us with that. We are also upgrading the technical capability of the site. We are implementing a whole new platform that is going to be in operation next year and would allow us also to expand and take equal commerce overseas. We are expanding our e-commerce operation overseas.

As to the potentials, for example I know that the e commerce sales for the quarter was slightly over 3% but the UGG e-commerce this quarter grew up 16.5% domestically. That is greater than what we have done in the domestic wholesale. It was a nice uplift from e-commerce.

Operator

Our next question is coming from Scott Krasik from BB&T.

Scott Krasik - BB&T

Just wanted to parse through some of your comments on how the business accelerating, is that across the board? I know there have been a lot of reports that the Classic business lagged in August and September, so are you specifically referring to that fashion. What are you talking about?

Angel Martinez

In august n September generally speaking especially when you have heat waves in various parts of the country, our business obviously kicks off when the weather cools off in terms of classics. Every year around this time we hear lots of comments about the classic business slowing down and every year round this time about a week or two from now you have a little cold snap and suddenly there is a rush to retail for the product.

We feel that and what we have seen, seen strong evidence of this, that HUG has created a category and the category is led by our sheep skin foot wear in one form or other as seen in every brand from Prada and Gucci, all the way through the line is here to say. It’s such a comfort component of foot wear. We feel that we interpret this idea better than any one. We intent to continue the love affair that consumers have with the brand as the authentic and mostly legitimate brand out there.

That said the market any market will always grow, mature, develop and evolve. We have to stay ahead of it with innovation, with technology, with great design and that’s where we’re making investments into. We have been doing that since I came here and before. It is just an ongoing part of trying to lead a market and every year the challenge is to be our own best competitor.

Scott Krasik - BB&T

That leads me to my follow-up. It’s a good problem to have, but retailers that we spoke with have said that the fashion product has sold great, but they don’t have enough of it and you guys didn’t invest in inventory to back it up to support them. Do you think you’re aggressive enough in terms of moving the brand forward?

Angel Martinez

Yes. We do. We feel that certainly with our retail distribution and the quality stores we work very closer with them to keep developing UGG brand in those stores. You can see the penetration of spread and assortment. We plan very aggressively the increases in the classic business, we have every year and what’s happening what you are seeing is classic is not very narrowly defined by us any more.

The classic category is a fairly large category is a fairly large category includes a lot of difference types of products. When you talk to your retailer about how is classic doing, it is their defining classic as chestnut sand and black Classic Short and not including in the definition of classic all the other products that are emerging from we’ve done the Cardy boots and variety of other things I mean those are all classic and those have been accelerating very nicely.

Scott Krasik - BB&T

Yes. I was thinking more along the lines of the riding boots and the wooden bottom clogs, and those sort of things?

Angel Martinez

Yes, we would not call those classic. That is more new product. That’s some of the diversified product line that you’re now seeing, which you mentioned it and that is growing significantly and it is dimensionalizing the brand at retail, it’s very exciting to see that happen. The consumer is seeing much more than what they originally came in to the brand experience and that is a good thing for everyone.

Operator

Our next question comes from Omar Saad from Credit Suisse Group.

Omar Saad - Credit Suisse Group

I apologize if you’ve already said this, but was wondering if you guys could share, just focusing on the UGG brand, what the US wholesale number looked like, and maybe give us an update on your channel strategy for UGG in the US? Are you guys thinking about expanding in the new distribution or staying tight on existing distributions? I’m sure there’s a lot of retailers out there knocking on your door dying to get the brand in-house. Then I have a follow-up question on some of the new brand initiatives you have.

Tom George

Omar, this is Tom. I’ll go ahead and give you the growth and our UGG US wholesale business. For the quarter, it is up around 10% year-to-date it’s up round 10% as well. We are pleased with that. I’ll turn it back over to Angel.

Angel Martinez

As far as our distribution, there are still segments of the country sections of the country where we can develop a brand further in south east primarily just open a store in Miami which is doing quite well in first two weeks of operation. The market has continued to evolve, as I mentioned, from original chestnut sand black and classic tall and short and ultra and in some markets now to the very diverse product assortment. We feel that we have a broad enough diversity of quality retailer that can take the brand through growth by category, in other words, category growth of brand in women’s, men’s and kids for the very near term.

Beyond the current core of customers, we see obviously opportunity with our e-commerce platform, we see opportunity with expansion of doors by our current customers and also for example opening more doors key independents who may open doors and of course our own store retail operations. We also feel it’s very important for retailers to be profitable with our brand. They have been and will continue to be because We are very careful in how we manage our distribution and we intend to continue that.

Omar Saad - Credit Suisse Group

On the brand (inaudible) very encouraging to hear that, you’re trying to really build it into a global brand and put the resources behind it. Do you or have you considered working with agencies around the world, or at least in the US to think about different marketing platforms? Are you going to stick with what’s worked from a marketing standpoint so far?

Angel Martinez

Well, marketing is one of those things that it has to keep revolving; you have to talk to the consumer in a language they understand in each market. When I say the language, I mean the marketing language. The platform we have been using which have been more traditional, the more traditional lifestyle and fashion orientation. We’ve been building the brand through very important fashion magazines, we’ve used outdoor signage, billboards etcetera in key cities, we’ve used retail presence and what we call VSM which is the in-store presentation.

We will augment all of that stuff. We have just talked about social network, social networking as a vehicle. That has been a ramp up. You will see the brands showing up in what I would consider more opportunistic environments like events that may be happening in key cities. We’ve done some things around that world that have been very exciting over the years. We will continue to do those in key markets around the world. When you have a retail platform that allows you to bring consumers into a location that creates buzz and opportunity for your PR efforts.

It is really a total mix of marketing. Our job is to figure out what the return on investment is with each of these categories of spending and marketing and drive obviously more money for those things that have proven to work. The good news is that you now have the capability to measure that our way, whereas in the past, as the old adage, on in 50% of advertising work, but just do not know which 50%. Here in this case we have gotten an opportunity to be much more precise with how we are spending our money.

Operator

Thank you. Our next question comes from Jim Duffy from Stifel Nicolaus.

Jim Duffy - Stifel Nicolaus

Thanks, nice quarter everyone. Good afternoon. Most of my questions have been answered. I did have one question on the sneaker line. Can you talk about where you’re hoping to take that? That’s been a nice contributor for you this year. Should be a four season contributor, and seems to have a lot of potential. Where do you see this going next year and in future periods?

Angel Martinez

Well, what’s great about the sneaker business, well, I am using that term loosely, because in a sense these are casual shoes that are designed to look like sneaker. You’re not going to go out and play any sports in them. The opportunity of color is fantastic. When you start developing sneakers, you can mix and match materials and fabrications in ways that you traditionally do not do and more contemporary, classic styles of casual shoes. It obviously appeals to younger consumer.

It allows you to freshen up the brand presentation with a lot of color and materials differentiation by channel of distribution because obviously some of your retailers might have an older consumer, might have, some might have a younger. It offers a lot of opportunity to keep that consumer, that consumer excited about coming in to retail. It is just fun, it is fun product, fun to wear and fun to buy.

Jim Duffy - Stifel Nicolaus

My sense is this could become a meaningful contributor. Am I off base there? I know it was small this year, but does it become meaningful in future periods?

Angel Martinez

I have a very good idea of how meaningfully contributory sneakers can be, having participated in that world for a long time. Yes, this is a big opportunity for us. We are trying to look at it with a different eye. It is, it is, you kind of ask yourself the what if question, if I wear a sneaker, what kind of sneaker would it be. We have been asking ourselves and we keep coming up with surprising answers that consumer keep validating. We’ll keep doing that exercise.

Operator

Thank you. Our next question comes from Bill Fazilem from Trade In Capital Management.

Bill Fazilem - Titan Capital Management

Thank you. That is Titan Capital Management. You had mentioned in your opening remarks that you had increasing enthusiasm for the Tsubo, Simple and Ahnu brands. Would you please discuss what’s leading to that increased enthusiasm, please?

Angel Martinez

My enthusiasm is always really taken from the retailers enthusiasm and my measure of success for an upstart brand is how willing are retailers to give you more real estate broad and spread and assortment, may be push something off the shelves and replace with one of your items from a small brand. That is a very difficult to do today. I mean if I could snap my fingers and say, we’ll we just, we are just going to use the power we have in the market to force product into the distribution.

We do not operate that way. We feel every brand has to stand on its own merits and excite the consumer. Retailers seemed to be agreeing that these brands are gaining momentum. There is some great styles and great designs, great price points and we are gaining markets share, we are gaining shelf space. That is where my enthusiasm comes from and it’s coming from when I am seeing all over the world. It is not just the US, of course these are still small brands, but we really do have to start somewhere.

We had a lot of fixing to do across the board with these brands and to get them properly defined and envision and really build that brand platform for growth. We are getting there very quickly. I’m looking forward to significant things in the next few years in the smaller brands.

Bill Fazilem - Titan Capital Management

Following up on that, of the three brands, which of the three, if you had to choose, would you be finding the most enthusiasm by retailers or maybe said another way, which one could hit $50 million the first of the three of them?

Angel Martinez

You are asking me which of my kids is the best looking. It’s really a tough question to answer. I do not think I can answer. I’m not going to get myself in huge trouble. It just, part of it depends on how you want to define. Like for example if you take the Simple brand and the product that made Simple famous for so many years a shoe called the old school and the woman’s shoe called the sugar.

Those items were in a sense of backburner for a few years and now they are being brought back to the front. What we are finding out is retailers love those items. Those are great items. They just wanted more color, more excitement, more assortment, more freshness.

When we are showing Simple in the more, what I would say the back to basic Simple that we have been talking about with retailers in the last few months, there is a heck of a lot of excitement about that and guess what that is a very big category of product, so, and was a very big pipeline to fill. Vans sells a lot of shoes, Converse sells a lot of shoes. I would not mind being the number three brand in vulcanized canvas products of Vans and Converse. That is a big opportunity.

Maybe Simple could be of all of them, but when it gets to the bigger number quicker because it has got a bigger pipeline opportunity. That said Tsubo is a brand almost at the other end of the spectrum which is very exciting from a design point of view, the leadership brand and design.

It breaks a lot of moulds if you will in terms of what is contemporary and how do you find that intersection of style and comfort. We do not expect that brand has a giant pipeline to fill, but if we could be with Tsubo in every key footwear boutique that we need to being in the US and the rest of the world. That is actually a pretty significant objective and a very important thing to do. It is kind of a different brand for a different purpose, you know what I mean

Operator

Thank you. We have time for one further question and our last question comes from John Hurshtrip from Sheffield Management.

John Hurshtrip - Sheffield Management

Hi. How are you? I was wondering, you commented on how important it is that the weather always breaks sometime around this year. Are you finding any problems in terms of just customers getting nervous or wholesalers getting nervous with the weather staying warm across the country through November? I thought if we looked back into last year, you know, you really would have already seen it break at this point. Obviously no one can control the weather, but curious at what one point you would actually get concerned?

Angel Martinez

Well, I mean if it’s 85 degrees on January 15 in New York City that could be a problem. In the end, obviously the weather is pretty cyclical. If you look at California as an example, middle of winter here in Southern California it’s about 70 degrees, and 65 on a cold day and we saw a lot of in that environment. Is there a chill in the morning, is there a chill in the evening, it’s weather. It is about a time of the year as much as it is the actual temperature outside now is functionally staying warm? Sure.

That is very important and when the weather gets cold, the UGG product does not come off the feet at all. I mean, so, it is almost like at the time of year that has emerged for UGG as much as it is they are an actual temperature. Every year there are different cycles.

A few years ago it was pretty warm all the way through October, all the way through the beginning of November and then what happens is that we got pretty crunch for demand and the weather just got a little colder; it did not get really cold. It just depends. It is a brand that consumers have a love affair with for a whole lot of reasons; cold weather is just one of the reasons.

Operator

I would now like to turn the call back over to Mr. Martinez for any closing comments.

Angel Martinez

Well, thank you very much for all of your questions and for participating on this call. Clearly it has been an excellent quarter. We anticipate that we continue on our trend. We are very much looking forward to the February call where we can give you more detail on what we are planning.

It is important for us to really thank our entire team around the world, specifically our newly emerging team in Japan, our new emerging team in the UK, in Benelux as well as all of our retailers around the world. We really appreciate your support and look forward of being able to continue to develop your the businesses together. Thank you.

Operator

Thank you. This does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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