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Deckers Outdoor Corp. (NYSE:DECK)

Q1 2015 Results Earnings Conference Call

July 24, 2014 4:30 PM ET

Executives

Linda Pazin - Vice President of Investor Relations and Corporate Communications.

Angel Martinez - President and CEO

Zohar Ziv - Chief Operating Officer

Dave Powers - President, Omni-Channel

Tom George - Chief Financial Officer

Analysts

Camilo Lyon - Canaccord Genuity

Erinn Murphy - Piper Jaffray

Evren Kopelman - Wells Fargo

Bob Drbul - Nomura

Sam Poser - Sterne Agee

Scott Krasik - Buckingham Research

Eric Tracy - Janney Capital Markets

Taposh Bari - Goldman Sachs

Jeff Van Sinderen - B. Riley

Randy Konik - Jefferies

Mitch Kummetz - Robert W. Baird

Corinna Van Der Ghinst - Citi

Corinna Freedman - Wedbush Securities

Howard Tubin - RBC Capital Markets

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Deckers Outdoor Corporation's First Quarter Fiscal 2015 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 everybody that this conference is being recorded. I will now turn the call over to Linda Pazin, Vice President of Investor Relations and Corporate Communications.

Linda Pazin

Welcome, everyone, joining us today. Before we begin, I would also like to remind everyone of the company's safe harbor policy.

Please note that certain statements made on this call are forward-looking statement within the meaning of the federal security laws. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995.

All statements other than statements of historical facts are forward-looking statements. These forward-looking statements include statements related to the company's anticipated financial performance, including its projected revenues, expenses, gross margin, operating margin, capital expenditures, earnings per share and effective tax rate, as well as to the company's brand strategies, store expansions and cost structure, as well as the outlook for the company's markets and the demand for its products.

The forward-looking statements made on this call are based on currently available information, and because the company's business is subject to a number of risks and uncertainties, some of which may be beyond its control, actual results may differ materially from the results expected at the current time. The company has explained some of these risks and uncertainties in its earnings press release and in its SEC filings, including the Risk Factors section of its annual report on Form 10-K and its other documents filed with the SEC.

Listeners are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. The company undertakes no obligation to publicly release or update the results of any revisions to forward-looking statements.

As a reminder, we have posted supplemental information about the 2015 first quarter in a document entitled first fiscal quarter 2015 commentary on our corporate website at www.deckers.com. You can access this document by clicking on the investor information tab and then scrolling down to the featured reports heading.

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

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

Angel Martinez

Well, thank you, Linda, and hello to everyone. Zohar Ziv, Chief Operating Officer; Dave Powers, President, Omni-Channel; and Tom George, our Chief Financial Officer are also on the call.

While we are pleased to have achieved the 24% revenue growth for the first quarter, which was driven by the growing year round strength of UGG brand, combined with increased contributions from our Teva, Sanuk and HOKA brands. We believe that the investments we’re making to build the world-class omni-channel organization and transform our business from a domestic footwear wholesaler into a leading multi-channel global brand operator are having positive impact on our results.

We’re better connecting our consumers with our brands and driving sales, fueling a solid start to the new fiscal year. This year we brought to market the most complete spring collections ever across our brand portfolio and the customer response has been very positive. We believe that the combination of great product and our enhanced selling and marketing capabilities that we have developed as a part of our omni-channel strategy as well as our expanded store presence are all fueling strong growth across our brands.

For the UGG brand, this spring was about diversity, giving the consumer a broader selection of fashion and casual boots, shoes and sandals that reflect the UGG brands accessible yet premium brand ethos.

At the start of the quarter specialty classics, slippers, and fashion boots continue to sell well following a very good winter. As temperatures turn more seasonable later in the quarter, sell through of fashion and casual sandals and casual shoes picked up and this momentum carried through July.

The UGG brand’s first quarter performance was also driven by higher initial fall shipments, as many wholesale accounts and international distributors increased their orders for our expanded offering of transitional styles which start to arrive on shelves in the coming weeks.

Now to Teva where the focus has been on evolving the brand beyond its traditional outdoor distribution into more mainstream retail in order to target a larger audience. The primary vehicle driving this initiative is our Originals collection. A product line of sandals derived from the Teva brands authentic boots in Whitewater and iconic styling that originally put the brand on the map, but with more modern trend right style product that appeals to today’s consumer.

Originals performed well in the first quarter despite the slow start to warm spring weather. By focusing time, effort, and resources on key retailers that we believe fit our distribution strategy, we were able to drive double-digit sell-through while also reaching new and influential consumers.

Sanuk had a strong quarter due in large part to the continued success of women’s sandals, most notably the Yoga Sling series. What has been particularly encouraging is the performance of the yoga franchise in many of the brand’s larger national accounts including Nordstrom, Dillards, Journey's and DSW. Since we acquired the Sanuk brand, one of our primary goals was to extent the brand’s presence beyond the action sports lifestyle channel and evolving into a more year on brand.

The success of the spring line has helped us gain more shelf space for our fall offering that now includes the broader selection of casual shoes and boots that can be comfortably worn during colder weather.

The HOKA ONE ONE brand’s momentum continues to gain pace. We believe that our innovative new products are garnering great attention and our expanded distribution is opening up a wider consumer audience. From a product perspective, we believe that HOKA’s unique higher volume and soft density material is proving to be a disruptive force in the running shoe industry.

We’re seeing this unfold in sell through of the brands latest introduction, the Conquest and the Clifton. At this stage, we’re still very much in seed mode and we plan to continue to limit distribution as especially running channel, as we cultivate brand authenticity. That said, we believe HOKA differentiated market positioning provide us the opportunity to develop product line expansion for the larger national sporting good chain and athletic specialty stores.

This is something we're working towards for early next calendar year. As we just heard, the new fiscal year is off of a solid start. Now that we’re three month closer to our peak selling season, we remain confident in how the business is set up for success over the remainder of the year.

Among the key pillars that support our outlook is a successful fall prebook that we completed in late April. In addition to growing of the order book, the composition was a positive indication that our wholesale accounts and international distributors have a higher degree of confidence in the UGG brand expanded collections of fashion boots, casual boots, shoes and slippers following strong sell through this past winter.

Retailers also responded favorably to updated styling and sharper price points on many key styles, which we believe will also resonate with our consumers, included in these years prebook with I Heart UGG, a new premium brand created by UGG that caters to the tween girl. Now we’ve just launched at select retail locations, including several of our company-owned flagship stores in the U.S., in China and Japan as well as Nordstrom, Zappos and Dillards.

This includes many high-traffic locations, such as Mall of America, South Coast Plaza, Madison Avenue in Chicago, among others, and also in our brand showcase store here at headquarters. And we're also opening two I heart UGG concept stores in late August, including a 600 square foot store in San Francisco and a 1,000 square foot store in Waikiki.

There was great interest generated from the preview of I heart UGG and the launch could certainly have been wider. However, we chose to limit distribution out of the gate in order to test the market response before potentially expanding the line from both a style and door standpoint next year.

We’re very excited about the new line and feel very good about its growth prospects given both the quality and the appeal of the product that we’re introducing. We’re rolling out a marketing campaign which taps heavily into social media and leverages direct association with key movie and TV stars that are well known among between audience.

Hoka One One’s recent performance also contributed to our prebook performance and is helping to fuel our optimism about our growth prospects in fiscal 2015. While still a small percentage of our overall business focus growing rapidly and we believe that has a sizable runway in front of it. We think it has solid potential to capture additional market share of the global $14 billion running category over the long term.

Another pillar of our outlook is the increased investments we’re making in our brands. For fiscal 2015, we’ve increased our total company marketing spend as a percent of sales to approximately 6% from little over 5% in our last fiscal year. The majority of the increased marketing spending is being directed towards the UGG brand with the incremental dollars going towards the combination of digital programs and tactics aimed at broadening brand awareness and driving traffic to our direct-to-consumer channel.

Spearheading this initiative is UGG brands first global brand marketing campaign titled this is UGG. The campaign take the physical feeling of the UGG brand DNA and turns it into an emotional connection assuring how the brand fits into consumers’ lives in smaller moments that are actually the biggest. These biggest moment that feel like nothing else.

The goal is to connect with consumers on an emotional level positioning UGG as a global premium lifestyle brand year out. We also plan to integrate Tom Brady, the face of our men’s campaign into This is UGG through a series of print and digital stories that focus on his best moments off the field.

This is UGG kicks of August 18th and the men’s campaign debuts in early September in conjunction with the start of the NFL season. This month we supported the launch of I Heart UGG through coordinated print, digital and in-store activations. And they are communicating how the product is uniquely different from the UGG brand that incorporates the UGG brand DNA.

We want to convey to the tween consumer that I Heart UGG brand is fun, young and playful and delivers the comfort and craftsmanship that is synonymous with iconic global UGG brand.

Now let me turn the call over to Dave, who will discuss the direct-to-consumer division in our international wholesale business, the other main pillars of our growth strategy. Dave.

Dave Powers

Thanks Angel. Our direct-to-consumer business continues to generate solid gains with the first quarter total sales increasing 33% over last year and DTC comparable sales, which include worldwide retail same-store sales and worldwide comparable e-commerce sales increasing 10% compared to the same period last year.

This was driven by a 39% increase in comparable e-commerce sales as digital traffic and conversion were both up double digit, partially offset by a low single-digit comparable store sales decline. While store traffic has a challenge, we are pleased with the trends in store conversion which are up double digit in every region compared to the same period last year, giving us confident that the steps we’re taking to elevate the in-store experience are yielding returns and that webrooming is the positive trend in the marketplace.

By region, Asia Pacific DTC comps increased 38% compared to the same period last year, fueled by strong trends in both Japan and China. North America DTC comps rose 5%, driven by strong e-commerce sales partially offset by weaker store comps. In EMEA -- EMEA DTC comps decreased 1% with soft store trends offsetting strong e-commerce results consistent with the European market.

We believe that particularly in the footwear business a significant number of consumers try on product in brick-and-mortar locations and further research and purchase products online. As a result, we believe that our stores and website are interconnected in a way that requires them to be analyzed in a combined basis.

We now know that brick-and-mortar locations fuel e-ecommerce and vice versa. And we believe that a portion of our e-commerce growth is fueled by our increasing store base. We see the internet UGG program and similar omni-channel initiatives providing increased contribution to overall DTC comps going forward as we further tie our stores and website.

As we look towards the remainder of the year, we feel good about the opportunities for the continued extension of our DTC business. With respect to our store expansion plans, we are still targeting between 30 and 35 new stores for this fiscal year.

We will continue expanding our store print in Asia Pacific where we current currently experience the highest returns due to lower buildout in operating cost, combined with higher productivity. The remaining locations will be in North America with the mix of high return outlet location and high-traffic concept stores in major metropolitan cities like Las Vegas, Seattle, San Francisco, Waikiki, Toronto and Vancouver. We’ll also be expanding our international digital presence through new country specific e-commerce sites for Germany and Italy.

At the same time, we are continuing to unveil enhanced features of our omni-channel strategy in order to better serve and connect with our customers regardless of where they choose to shop for our product. As we have discussed on past calls, we are taking a very holistic approach to growing our global DTC business with consumer firmly at the center of everything we do which is leading our long-term strategy.

The key next step of our omni-channel evolution will be the opening of a smaller concept on omni-channel store in Tysons Galleria this fall. That will feature new in-store web technology such as interactive displays and the ability to reserve online and pickup in-store.

Additionally, we believe that several of the initiatives we began testing in rolling out in the last two years such as Infinite UGG and UGG by You, Swarovski Crystallization are now poised to generate even greater results. As a result, we are extending our successful Infinite UGG program to all stores in North America, all concept stores in Japan and introducing the program in EMEA this holiday season.

Infinite UGG gives us the ability to offer our retail customers every skew available from the UGG brand to our in-store POS system which we believe will enhance customer satisfaction and DTC growth. Our UGG by You customization program will include additional files and design details for the consumers to choose from such as the popular daily bow and daily button.

As part of our continued omni-channel investments, we’re also extending retail inventory online or RIO, a new tool launched this past spring in select stores in North America and EMEA advance of the fall and holiday selling season. RIO provides customers with visibility into store inventory, helping them to efficiently locate the product they want prior to visiting the store.

In tandem with this feature, we’ll also be rolling out purchased online pickup in-store, in both the U.S. and EMEA this fall supporting increased convenience for accessing and purchasing our product while driving traffic to our stores. We're looking forward to taking full advantage of our omni-channel platform this fall and beyond.

In addition, we’re also making great progress in building our universe of customers through email captures and loyalty program as over 50% of all opt-ins or signups now come from our retail stores and we’re continuing to inject exclusive product created just for our DTC platform supporting fresh merchandise in the market and adding to the appeal of the in-store experience.

We believe the combination of these initiatives should help drive incremental traffic to our brand and higher conversion combating macro traffic challenges, which in turn will fuel total same-store sales growth.

Turning to our international wholesale and distributor business, we completed the transition toward direct subsidiary model in Germany on July 1st as part of our strategy to gain more control over the global direction of our brand. The changeover went smoothly and we are now in the process of filling out the leadership team that will help us build our presence in this large and important market.

Elsewhere in Europe, we experience solid sell through of spring styles from the UGG and Teva brand driven by the positive consumer response to our updated styles and sharper price points combined with much warmer weather across the region compared to the same period a year ago.

Overall we are pleased with current state of our EMEA wholesale and distributed business but do remain a bit cautious heading into the fall season given the soft traffic trend that many of our key retail partners particularly in the U.K.

In Asia Pacific, we remain on track with our partner store program in China, which for reporting purposes are treated as wholesale account. We expect there to be at least 10 stores opened this year on the terms of the agreement we have signed with these three new partners.

Again, these stores are in addition to the company-owned stores we plan to open this year. Our new partners will open doors in areas of China where we have little-to-no presence and believe the local operator is in a better position to run these stores successfully.

We spent a considerable amount of time this past quarter and continuing to develop and fine tune our omni-channel capabilities and the long-term roadmap for building world class omni-channel organization globally. We are very excited about the UGG brand’s upcoming fall campaign, 'This is UGG', which we will launch in August and we are also pleased with how our holiday plans are coming together for the season.

We believe we will benefit from our most compelling product stories ever and we are optimistic about our opportunities with casual boots, weather appropriate product, limited addition collections, and customized product, as well as our men’s twin fill and tread light programs. We believe these product innovations along with our focus on storytelling will lead to deeper engagements and interest among consumers, improve comp results in our stores and continued improvement in conversion.

With that, I will turn the call over to Tom. Tom?

Tom George

Thanks, Dave. As Linda reminded everyone, we posted the quarterly financials to our IR website so my comments on the call are going to be brief and focus primarily on guidance. For the first quarter, we exceeded our revenue guidance by approximately $21 million and exceeded our earnings per share guidance by $0.26.

Nearly half the upside revenue was attributed to the timing of wholesale and distributor sales and the other half with some higher than expected sales. The higher than expected sales contributed approximately $0.05 to the EPS while the other $0.21 was due to the timing of sales and operating expenses.

For the fiscal year ending March 31, 2015, we now anticipate revenues to increase approximately 14%, up from previous guidance of 13%. Our underlying assumptions of our guidance remain the same from last quarter. We are still planning for the addition of 30 to 35 new stores, a low-single-digit store comp increase, and a double-digit increase in comparable e-commerce sales. Wholesale and distributor sales for all brands are still projected to be up low-double digits driven by our Germany conversion, a high-single-digit increase in UGG domestic sales, and continued growth of the HOKA brand.

In terms of the bottom line, we now expect fiscal year 2015 diluted earnings per share to increase approximately 14.5%, up from 13.5%. This guidance assumes a gross profit margin of approximately 49% and an operating margin of approximately 13%. We expect fiscal year 2015 SG&A expenses as a percentage of sales to be approximately 36%. Among other items, these expenses include increased marketing and supply chain cost, investments in IT infrastructure, expenses related to management reorganization, and operating cost associated with opening new stores in 2013 and 2014.

As we previously said, we expect to achieve SG&A leverage in the back half of calendar 2015, which will be our fiscal 2016. Our fiscal year 2015 guidance assumes that the company's effective tax rate will be approximately 29%. Our capital expenditures for fiscal 2015 are expected to total approximately $100 million. This includes $37 million for IT and related infrastructure to support our omni-channel strategy and international expansion, $30 million in new store openings, and $26 million for the new distribution center.

For the second quarter of fiscal 2015, or three months ending September 30, 2014, we currently expect revenues to increase approximately 18% and diluted earnings per share of approximately $0.98 per share. One more note on guidance, the third quarter ending December 31 or old fourth quarter will generate a lower percentage of our total annual sales and profits than in prior years due to higher profitability in our new fourth quarter ending March 31, 2015.

With the concerns of a potential West Coast port strike, we made the decision during the first quarter to accelerate some product originally planned for Q2 receipt in the Q1 to minimize the impact of a potential strike. We also routed some containers to non-West ports. These measures increased our Q1 ending inventory position by approximately $17 million but will help address the impact of a potential strike.

We are looking forward to hosting our first Analyst and Investor Day at our new headquarters. We had initially planned to hold it in late September. With Q3 earnings released in late January, which include the bulks of results from the holiday season, we now plan to host the event sometime in the spring of 2015.

Finally, the company believes total DTC comparable sales, including same-store sales and worldwide comparable e-commerce sales, is a more accurate measure of retail performance. We see many of our omni-channel initiatives providing increased contributions to overall DTC comps going forward, as the lines between stores, site traffic and sales transactions have become blurred. For these reasons starting next fiscal year, we will begin only reporting a combined DTC comp.

I will now turn it back over to Angel for his closing comments.

Angel Martinez

Thanks, Tom. The investments that we made as a company the last several years are part of a much bigger strategy to deliver sustainable growth and enhance profitability over the long term. I think it’s important to point out that many of these investments are focused on marketing our new distribution center, which will meet the demands of today’s consumer with shopping across all channels and improve business intelligence systems that are necessary to drive growth moving forward in omni-channel environment.

Now think back, just a few short years ago we were a wholesale vendors that deliver product twice a year and our success was largely driven by how well buyers, wholesale buyers responded to our collections at industry tradeshows. The consumer had very little influence in shaping our future direction. This dynamic has been turned completely upside down. The consumer is now the gatekeeper and we've transformed our business model to not only adapt to the new retail paradigm but also to thrive and to grow.

We now drop product more than 10 times a year and communicate with consumers on a much more frequent and personal basis. This constant flow of information is reshaping our growth strategies including our product development and store expansion plans, as we now have much better insight into pinpointing demand and directing capital towards what we believe will be high return, high productivity locations.

Our team saw this shift in consumer behavior unfolding early on and we think we are one of the leaders in the industry when it comes to making the necessary adjustments in order to succeed in today's global marketplace. As we move forward, we will continue to fine tune our merchandise, our marketing and our omni-channel strategies to ensure and we are constantly strengthening our connection with consumers and delivering them the innovative and exciting product they demand in the environment that they choose.

We will also continue exploring ways to enhance our supply chain to drive down cost and improve efficiency to generate operating leverage. While it's early in the new fiscal year, we certainly have a good deal of confidence in our outlook for fiscal 2015 based on the strength of our fall collections and the concerted investments we are making in our brands and the omni-channel capabilities.

Operator, we are now ready to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question is from Camilo Lyon with Canaccord Genuity.

Camilo Lyon - Canaccord Genuity

Thanks. Good afternoon. Very nice job on the quarter guys. I just want to have a clarification question on the gross margin in the current quarter and the quarter just reported. If you could just highlight some of the puts and takes on the gross margin. And maybe, Tom, if you could just give us a little bit of key, then to walk through and how we should think about gross margin expansion quarter-to-quarter for the balance of the year?

Tom George

Okay. For the quarter, essentially what happens we came in pretty much in line with our internal expectations that was down slightly and that was primarily due to good half of the sales beat being from wholesale and distributor sales it carry lower margin. So good news, we beat the sales line, but there was a little due to the mix, so there is a little bit of a pressure on the margin. And that for the quarter, since we offset, what lift we had for more DTC expert, DTC business from relatively a year ago, as well as what sheepskin savings we had. And keep in mind that this quarter is a quarter that the sheepskin savings are less impactful than they are in later quarters.

And in terms of the cadence for future quarters, there is going to be what we anticipate at this point in time is expansion obviously in the out quarter with looking through here roughly the same amount, Q2 and Q3 will have the same amount of expansion between one another. So about the same expansion for Q2 and Q3 relatively to the prior year. In Q4, a little less expansion because we lap some of the sheepskin savings.

So for the June quarter and the September quarter, you have some benefit of direct to consumer, more direct to consumer content. You also have some sheepskin savings relatively to the prior year, as well as in the June quarter -- excuse me in the September quarter and the December quarter, some benefit associated with the conversion to Germany business. So direct model versus the distributor model.

Camilo Lyon - Canaccord Genuity

Fair enough. That’s very helpful. Thanks. And then just on the inventory position, you guys have done a great job of managing the inventory very cutely. Is there a thought or maybe a fear that your inventory might be on the linear side then you’re comfortable with or you pretty good with it’s from the perspective of being able to meet that once order should the season call for it?

Tom George

We feel that we have the right inventory levels and we should be in a better position this season to be able to service some more in-season demand.

Operator

(Operator Instructions) We have the question from Erinn Murphy with Piper Jaffray.

Erinn Murphy - Piper Jaffray

Great, thanks, and congratulations on a very good quarter. On how far you are -- just wonder if you could pick a little bit more about the buzz that you have had or heard so far about the I Heart UGG launch. I realize it’s only been over a week now, but maybe just helping understand how you think about the rollout going forward beyond this initial fall season?

Angel Martinez

Yeah. Thank you, Erinn. We are very optimistic given what we've seen so far, but as you’ve said it's extremely early. The activity gears up around the digital marketing efforts here as the quarter progresses, so we’ll know a lot more. The response we’ve had through the next season’s product has been very, very strong. I think you can start to see the dimension that this little brand is going to take on.

The appeal to that twin consumers is pretty significant. I mean, and thinking about this, its also not just footwear, it's handbags, it’s accessories, it's a lot of things that sort of round out this statement that we’re making with I Heart UGG. So too early to tell, but all the indicators are very positive and we feel confident that the consumer will react. Probably beginning with, we shouldn't see a nice little bump with back-to-school and then of course as a fall weather changes.

Operator

Thank you. We will take our next question from Evren Kopelman with Wells Fargo.

Evren Kopelman - Wells Fargo

Thank you. Good afternoon. Congratulations. Can you comment on -- you mentioned the shift in the wholesale out of or into Q1, but your second quarter sales growth guidance is pretty strong as well and then the back half looks lower. Can you comment on some of the dynamics that’s driving the 18% sales growth guidance in the second quarter and then lower in the back half? Is there more shipment shift? Some of that would be great. Thank you.

Angel Martinez

Some of it is the timing that shifted from the June quarter and to the September quarter. Some of it that sort of a take, whereas on the put side there's now we’re direct in Germany, we’ll get a lift in sales and that contributes to some of the sales growth on that side of equation. They have more stores relative to a year go. That’s another thing is driving that growth and we feel real good about U.S. UGG, U.S. domestic wholesale business also this September quarter.

Operator

And we’ll take our next question from Bob Drbul from Nomura.

Bob Drbul - Nomura

Hi. Good afternoon. The question there -- Tom, around the gross margin again, on the fourth quarter you talked about you’re wrapping the sheepskin. Can you put some numbers around the cost of sheepskin in the fourth quarter? And I guess, corresponding that to the continued penetration of the Pure business on the input cost side and sort of how that's playing through the business model into this year?

Angel Martinez

Good question. Given we don’t finalize our sheepskin for the next calendar year until October timeframe, what assumptions we have for sheepskin now in the new fourth quarter, which is the March ending quarter is really a continuance of our current, not only sheepskin cost but our current penetration of UGG period at this point in time. So if we get more visibility of sheepskin cost, which we will have for the October call and at that point in time we will use even have more visibility what our next year’s penetration appear will be, we will be probably refine that number.

Tom George

I think what we said in the past is next year we should expect penetration about 40% of Pure. Keep in mind that new product launches such as I Heart UGG are exclusively are Pure. And so as that grows, it could accelerate our incorporation of UGG Pure into the product line. Twin soul is another example of where we used our Pure to enhance product in ways that consumers really respond well to creating a much better price value. So we're very selective and judicious about where we use our peer but the benefits to the consumer are pretty obvious.

Operator

Thank you. We’ll take our next question from Sam Poser with Sterne Agee.

Sam Poser - Sterne Agee

Good afternoon. I’m going to ask you a long one. Can you tell us the same question for Camillo on the SG&A and can you give us the UGG wholesale business was for Q1?

Angel Martinez

No, we don’t give that -- those element.

Sam Poser - Sterne Agee

It will be on the queue. I just wonder if you give us what the wholesale revenue was for Q1.

Tom George

So on a global basis for Q1. Correct me, if I’m wrong, we’re approximately $74 million. So it is that. Some of the SG&A, sort of that, cadence, more SG&A growth in the September quarter, relative to the growth we saw in this quarter, moderate this growth obviously in the December quarter, we’re marketing there some growth and then there will be more storage as well. And then the March quarter, the SG&A growth is pretty comparable to the growth we saw this quarter we just completed in absolute dollars.

Operator

Thank you. We’ll take our next question from Scott Krasik with Buckingham Research.

Scott Krasik - Buckingham Research

Hey, everyone. Thanks and congratulations. A sort of a two-part question on the EMEA, if you can just dig into the Germany opportunity, I think you had some of a capital constraint distributor. So what the opportunities are that you just have been recognizing at all. How big that, you think that can be in a couple of years and then you alluded to caution around the U.K. What did you mean exactly? Is that the wholesale business, the retail business? Any color you could give? Thanks.

Dave Powers

Yeah. Thanks. This is Dave. With regards to Germany, if you think about that market now, it’s been a wholesale lead market and it’s a very healthy market that we’re taking over and transitioning into. But we believe that we with the expertise we have in the region through marketing and merchandising that will help our existing wholesale business and not necessarily looking at new distribution opportunities because we have the pretty solid distribution network now but just enhancing that business through marketing and merchandising.

And then going direct through e-commerce which we’ll be launching this year and in fact, I’m heading over to Europe tonight to travel Germany next week to start looking at store locations. So we think the potential for that market is very strong and the brand awareness is strong. The brand is in healthy position and so the combination of elevating wholesale, activating ecommerce and direct-to-consumer retail, we think it could be our second largest market in few years.

With regards to the comment about just being a little bit cautious about wholesale that’s with regard to the macro condition of the European market, particularly the U.K. market, more with regards to our wholesale partners and just making sure that we’re keeping a close eye on them and their traffic patterns as the whole market is seeing slow traffic to stores, brick-and-mortar stores. And so we don’t want to get too excited about that until we see how the traffic -- macro trends continue in that market.

Operator

Thank you. And our next question is from Eric Tracy with Janney Capital Markets.

Eric Tracy - Janney Capital Markets

Good afternoon. Thanks for taking my question. I’ll add my Congrats. I guess for Dave to follow up on DTC, certainly understand the evolution of the omni-channel business but given that you commented on essentially folks are now more showrooming there at least, trying on product and then going, buying online. How do you think about the evolution of brick-and-mortar format. Sounds like you’re going to rollout towards this or at least test a more tech-driven concepts here in early ‘15 but maybe just speak to that as well as what are the potential opportunities from a marketing perspective trying to drive traffic actually to the stores as well?

Dave Powers

Yeah. It’s a great question and just before I jump into that just to define webrooming as I mentioned that in the commentary. Webrooming is the practice of searching online and then shopping in store. So it’s kind of the opposite of showrooming.

And what we’re finding with the combination of our stores in e-commerce site is they are more interconnected than they have been. And consumers are, they are both showrooming and they are webrooming. And what we’re finding through that is that we have the ability to drive traffic from one channel to the other. So if you think about the effective opening of stores. This is how we’re looking at it now.

When we open a store in a metro area, we do the sales in the four walls of that store. We also have Infinite UGG which delivers sales through our e-commerce site than we capture customer data which in turn leads to sales in our e-commerce site. And then we create awareness in the market places which drives even more business to e-commerce.

So we’re starting to think about the stores as not just the store in a four-wall P&L but a store that impacts the overall macro environment of our brand in that metro area. The inverse of that is that we have the ability now through analytics and increasingly CRM and loyalty programs through e-commerce to better target customers in those metro areas we know where they are. And we can send them through merchandising and marketing initiatives digitally back to the store.

So that’s why we’re looking at this as a combined ecosytems, stores in e-commerce sites, feeling each other, looking at across P&Ls, across the organization, across merchandising. And so as we look at that, it weighs heavily into our decision in where we want to put stores. And we have more analytics than ever to decide where we should put the stores based on what our consumers are buying, where they live, what we’re learning from analytics and social to target key metro areas.

That being said, we’re still looking at locations that are going to return above 20% return on sales being cautious of where that will be in North America. But that’s really North America, Europe, dynamic right now. If you think about Asia Pacific, particularly China where there isn’t a wholesale business, we’re still focused on large metro areas and key opportunities that we’re learning from our e-commerce business both through owned and partner stores.

Angel Martinez

Let me add to that, Eric. One of the key learnings here with an omni-channel strategy is the one we’ve implored is impacted -- really understanding how big are the stores that you should be opening going forward and because you may not need the backroom, you think you need. For example, we have a store downstairs in our headquarters here. It’s called the brand showcase, features all of our brands. The footprint of the store is much smaller than it would normally be because they are also banks of iPads that allow the consumer to access any of the products from the brands not displayed in the store directly online and available within 24 hours.

Interestingly, that aspect of the store is now 30% of revenue in the store. So 30% of revenue being driven without the need for the footprint and the needed backroom and the staffing that goes with that. So size of store and location of store are informed by the omni-channel strategy. Very, very important components going forward which should yield much better efficiency.

Linda Pazin

And just to clarify the Infinite UGG program, all the sales that take place on the iPad are credited as an e-commerce sale, not a retail sale. Although that purchase never would have occurred had that consumer not locked into the store. And we had tested that with a very small number of stores in the fourth quarter and December quarter of last year and that is now being ruled out to all of our stores in North America as well as stores in Japan as well. And we still expect that to contribute a much bigger percentage to our sales as that is being ruled out on a much larger scale globally.

Operator

Thank you. We’ll take our next question from Taposh Bari with Goldman Sachs.

Taposh Bari - Goldman Sachs

Hey guys. Good afternoon this quarter. Commentary for the spring season, I know everyone is focused on the outlook but spring season sound like it was a pretty good season for guys in what seems to be a pretty uninspiring retail environment. So do you feel like you gained share in the quarter over the season actually not as bad as maybe we would have thought?

Angel Martinez

I think what’s benefiting us or now that we have multiple brands performing in the spring and each of them is gaining share, certainly HOKA is gaining in the running, especially in the running area. I think that there is some share that Sanuk is gaining, specifically I believe from Tom’s. I think that’s an opportunity. And I think Teva is gaining significant share from Keen. So I think those are very important components that reflect the balance that we are now seeing in our spring portfolio approach. And don’t forget UGG’s performance in the spring was a record. So that continues to evolve very nicely. So we’ve got a spring offering that is stronger than we’ve had and all of those brands are performing significantly better than they have in the past.

Operator

Thank you. We will take our next question from Jeff Van Sinderen with B. Riley.

Jeff Van Sinderen - B. Riley

Hi, good afternoon. Let me add my congratulations as well. Can you talk a little bit more about the shelf space you’re gaining with Sanuk. I think you mentioned that in your comments. And then any more color you can give us on where you are in the process of rolling out distribution of HOKA?

Angel Martinez

Sure. On Sanuk, when we acquired that brand, the brand really was 70% men’s, 30% women’s. It was primarily distributed in surf shops and actions sports distribution. And we knew that the gender profile of the brand would need to alter significantly, if we would to have any hope of selling product in department stores for examples. So one of the things we are seeing with Sanuk is a major transition to a much more compelling women’s product offering.

We are now seeing that the shift has occurred. In many locations we’re 60:40 women’s to men’s. On our location downstairs, we are 60:40 women’s to men’s. In up stores, they are 60:40 women’s to men’s. And that’s being fueled by very specific product that for example the Yoga Sling and some of the new closed toe product that Sanuk has been performing well the slip ons. The casual canvas approach they are taking in men’s and women’s. So all those things are converting the brand to I think a much more commercial longer-term growth story, because we can now sell department stores whereas when we acquired the brand, I think we were very limited there because of the men’s dominance really.

In terms of HOKA distribution, we have made significant inroads in penetrating the running specialty environment in the U.S. We are now continuing that same strategy outside the United States in our key markets where we have decided to roll the brand out. We are also seeing as we mentioned -- I mentioned in my comments next year we will be moving into athletic specialty and sporting goods, with unique product specifically for that channel. These will not be products that running specialty we will be competing with which is very, very important.

The most thing is we will not be comprising the field and the performance of the HOKA product in any channel of distribution. So that consumer who shops at DICK'S Sporting Goods let’s just say is going to have the same HOKA experience that the person who is shopping and running specialty store. There will be different products. Also, we are running specialty store consumer. I think has a need for more diversity of product. Maybe when they started running, they went to DICK’s and bought shoes and then over time they migrate toward running specialty store where they can get specific shoes for toe running or for road running or maybe racing shoe or variety of other things. So that diversification of product line is offering up these opportunities and we are very excited about that.

Operator

Thank you. We will take our next question from Randy Konik with Jefferies.

Randy Konik - Jefferies

Thanks a lot. Good afternoon. So I guess my question is around posturing for holiday 2014 by your wholesale accounts relative to holiday 2013. How do you think they are giving us out their business? Going to holiday this year, how they’re changing their order patterns? What types of product changes are they making into their assortment? I am assuming that last holiday they didn’t have enough products to cut in by surprise. So I was just trying to get a sense of how they are thinking going into this year’s holiday. And then also just to clarify, did you say UGG Pure will be 40% by the end of calendar of ’14 or ’15? And then lastly from I Heart UGG distribution standpoint, would you imagine that being a potentially wider net of door distribution then your other lines like men’s or something that? How do we think about the actual distribution opportunity in that sub brands? Thanks.

Angel Martinez

Okay. First of all, the 40% is a calendar ’15 number. The I Heart UGG distribution will expand in reflection of the UGG distribution. It’s going to be primarily department store, our own stores and then key independent specialty retailers. So you can just look at the UGG footprint and pretty much assume that you are going to see I Heart UGG potentially in most of that distribution.

And when it comes to -- I think confidence is probably the most important word here. I think retailers have more confidence in the strength of the brand. The assortments are so much better than they have been. We now have very, very competitive product at the key price points that we did not have a few years ago. We have fashion boots. We have weather boots. We have product at say $175 which is a very, very important target for us.

So that has also given the retailer confidence. I think what you will see this year versus prior year is the much expanded assortment in the season, much less dependence on core classic and classic derived product. Yes, of course, those are all still very important, but you are going to see a side of UGG that you probably haven’t seen in prior years due to the strength of the offering and that will continue. And I think that that’s again giving people confidence in the fact that they are not going to walk a customer, who is looking for a fashionable season right product.

Operator

Thank you. We will take our next question from Mitch Kummetz with Robert W. Baird.

Mitch Kummetz - Robert W. Baird

Yes, thanks. A question for Dave. I was hoping if you could just maybe give us some color on the disparity in Q1 DTC comp by geographic region? I mean it seemed like Asia-Pac was particularly strong, really stronger than North America and Europe. And I was wondering if there is a reason for that difference.

Dave Powers

Yes, I think the biggest challenge from a comp perspective we saw was in Europe. As I said, it’s consistent with the market is seeing there, the traffic being challenging. Tourism in the Europe market is challenging. So the toughest market was Europe, followed by the U.S. But the U.S. was a small comp. And in fact if you add Infinite UGG sales back in, it gets back to flat comp in North America. So, pretty small overall. But the real shining star of the group is Asia Pacific both in China and Japan, with positive double-digit sales comps in those locations.

Then the thing that’s important to keep in mind about all this, even though we are having some challenging traffic locations in all market, our conversion was up double digit, 20% globally across all those markets, which really goes back to the point I have been trying to make in the last couple of calls is the investments we are making in our team, the capabilities around merchandising, inventory control and store experience, localize merchandising assortments that in tune with that local customer. Those are the things that are going to make a difference and going to allow us to continue to combat some of the traffic trends globally.

Operator

Thank you. I’ll take our next question from Corinna Van Der Ghinst with Citi.

Corinna Van Der Ghinst - Citi

Thank you. Hi, guys. You talked about the new innovations that you’re implementing in omni-channel with the customer moving between your website and stores. But how do you think this omni-channel shift is impacting your customers on the wholesale side of the business? And are you concerned at all that some of these innovations in your own DTC could eventually cannibalize some of your wholesale?

Angel Martinez

Yes. Good question. We’re learning about this everyday. I think the good news is that most of our key wholesale accounts are also investing in omni-channel capabilities. If you think about Nordstrom, they’re leading in airspace and getting in tune with their customers and adapting their stores and sites. But actually, we firmly believe that our stores in e-commerce site are driving traffic and awareness to the total business, including wholesale.

And one of the opportunities for us is to continue to use the analytics and information that we’re learning from our stores and our sites to help drive traffic to wholesale and vice versa. So I think consistent with what’s happening in the total marketplace. Those retailers who are realizing that there is a revolution going on out there and they’re changing their approach and implementing their own omni-channel capabilities. Those are the ones who are going to succeed and those are the ones who are going to continue to partner with.

Dave Powers

Let me add to that. I think that the -- one of things that’s obvious is the consumer today sees a product presentation online let’s say and expects that same assortment and that same product to be available at retail, either at your own stores or in a wholesale point of distribution. So as I was saying in my comments, while it seems that years ago, the wholesale buyer was the arbiter of what the consumer saw as a brand, now the consumer doesn't want that kind of editing going on.

They want to see what they expect to see on their iPad. They want to go to the store, whether it's your store or a wholesale partner and say this is what I’m looking for. I want this product. And if you don’t have it at that brick-and-mortar location, they walk out and order it online. So it behooves I think the wholesale channel to represent brand appropriately and consistently with what the brands are doing on their websites and on their own stores, otherwise they’re going to walk customer.

And the smart ones Nordstrom included Dillards. They see that and they are focusing on the brand that consumers are demanding and giving that assortment, the type of presentation that it requires in order to assure that kind of consistency.

Operator

Thank you. And we’ll take our next question from Corinna Freedman with Wedbush Securities.

Corinna Freedman - Wedbush Securities

Hi. It’s Corinna Freedman from Wedbush. Just wondering about your use of cash and you still have about $70 million on your share repurchase. I’m just wondering if you plan to return to the market anytime soon or is it just not a priority at the current time? Thanks.

Angel Martinez

That’s our high class problem, good margins, good earnings generate a lot of cash. And at this point in time really our priority is to reinvest in the business. And we do have that, $70 million available on the current share repurchase and probably that -- historically we've done share repurchases opportunistically and that’s probably leave it at that.

Operator

Thank you. We’ll take our next question from (indiscernible), Credit Suisse.

Unidentified Analyst

Hi. This is (Indiscernible) sitting in for Christian Buss. I was wondering if you guys could give us an update on your efforts to develop a new more capital efficient store. Wondering how far you would -- where you are in that process, whether you’ve identified appropriate markets or specific locations. Just want to see where we are in terms of rolling out at that first prototype? Thanks.

Angel Martinez

Yes. Good question. First of all the progress we’ve made over the last year and a half is pretty significant. The average cost to build of our stores has come down roughly 30%. I mean that’s largely due to the reengineering in the fixtures but also just been more efficient in our ability to build those stores with the right contractor and the right operations globally.

But that’s we’re continuing to look at that. The omni-channel store that we’re launching, in Tysons Galleria this fall is the next step but that once really more from the design of experience perspective. We’re still focusing on that as being an efficient store buildout. But long-term, I think we’re going to take a holistic approach and relook at the overall design of the UGG stores. See whether there’s efficiency in savings from the buildout of the fixtures, also in POS system and all the operational component of the store.

And that also plays into our conversation around smallest store footprints. So my goal overtime is to continue to lower the overall capital expenditure on a store that have been come down 30%, I think there is probably another 10% to 15% in there somewhere. And then as we open in Asia-Pacific, more stores in that region, those stores are less expensive to build than they are in North America, which would play into that as well.

Operator

And we’ll take our question from Howard Tubin with RBC Capital Markets.

Howard Tubin - RBC Capital Markets

Hi, guys. Maybe just follow-up on that question. Any more color you can give us on the brand showcase store, which we learned from it so far and with the potential for that concept is beyond the one store you have right now?

Angel Martinez

Yeah. Good question. Howard, especially since you’ve been to the store, you’ve experienced that. As we know, we learn from that store everyday. We’re testing a lot of different things in that store. We've recently been testing cross merchandising around category so you can walk in and see. But sandal table, that’s represented by all of our brands or boot table. We just launched I Heart UGG in there to see how that works with our local consumers.

We’re doing surveys with consumers. It really is proving to be a fantastic lab for us both on a consumer insight level, but also merchandising and in omni-channel perspective. As Angel mentioned 30% of our revenue in that store is generated through our Ipad e-commerce. So we’re learning about operational efficiencies and inventory control as well.

Based off initial response to the concept, which has been very positive in our desire to get more distribution for some of our smaller brands and more awareness for those brands. We are considering opening up a multi brand showcase store next year, not a guarantee but it something that we’re -- it’s on the list of things we’re looking at right now.

We have a store model and design that we think feels pretty good. And so we’re exploring that idea for both North America and key towards high visibility locations to showcase our other brand but also as a way to bring some of those brand into places like China and Japan in a more meaningful way as well. So far six to eight months in, we’re pretty pleased with how it’s working. Customer responses has been very positive and we think it something unique in the marketplace.

Operator

That concludes today’s question-and-answer session. Mr. Angel Martinez, at this time, I will turn the conference back to you for additional or closing remarks.

Angel Martinez

Well, thank you all for participating in the call. Clearly, it was a strong quarter, but we’re just getting geared up. You can see the progress we’ve made against our initiatives and the return that we’re getting on some of the investments we’ve been making over the last few years. And we’ll continue to drive this business as the opportunities continue to expand right in front of us.

Very proud of our teams, across all the brands and very proud of the brands. I think the brands have made tremendous headway in the last year particularly. And really appreciate your support and your confidence in us and our brands. Thank you all.

Operator

This concludes today’s conference. Thank you for your participation.

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