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Deckers Outdoor (NYSE:DECK)

Q3 2011 Earnings Call

October 27, 2011 4:30 pm ET

Executives

Thomas A. George - Chief Financial Officer and Principal Accounting Officer

Angel R. Martinez - Chairman of the Board, Chief Executive Officer and President

Analysts

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

Jessica Schoen - Barclays Capital, Research Division

Scott D. Krasik - BB&T Capital Markets, Research Division

Howard Tubin - RBC Capital Markets, LLC, Research Division

Jeffrey P. Klinefelter - Piper Jaffray Companies, Research Division

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Diana Katz - Lazard Capital Markets LLC, Research Division

Christian Buss - Crédit Suisse AG, Research Division

Taposh Bari - Jefferies & Company, Inc., Research Division

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Deckers Outdoor Corporation Third Quarter Fiscal 2011 Earnings Conference. [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 policy. Please note that certain statements made on this call regarding our expectations, beliefs and views about our future financial performance are forward-looking statements within the meaning of the federal securities 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. These statements relate to the company's anticipated revenues, expenses, earnings, gross margin and capital expenditures and the outlook for the company's markets and the demand for its products.

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

I would now like to turn the conference over to the President, Chief Executive Officer and Chair of the Board of Directors, Mr. Angel Martinez. Please go ahead, sir.

Angel R. Martinez

Well, thanks for joining us today. With me on the call as always, are Zohar Ziv and Tom George. I'm going to begin with a review of the main drivers of our record third quarter performance. And then, Tom will go through the numbers and outline our guidance. I'll then return and provide some commentary on the upcoming holiday season and our long-term outlook. And after that, we'll be happy to take questions.

As you saw from our press release issued earlier, we had a great quarter. Sales increased 49% to $414 million, and diluted EPS increased 49% to $1.59, both third quarter records for the company. Our recent performance was driven by strong demand for the UGG brand across our multiple distribution channels and geographic regions.

From a product standpoint, sales were very broad-based for the UGG brand, consisting of multiple boot collections and a growing assortment of casual footwear, this year's women's fall line is our most diverse ever. Boots included equestrian, cold weather, fashion, classics led by the Sparkle and the Bailey Button Triplet and wood-buttom styles. Casuals included clogs, slippers and sneakers, which have all sold very well. The introduction of our Italian handcrafted UGG collection was also well received.

Our men's business had a strong quarter too. September was highlighted by the debut of our new ad campaign featuring Tom Brady. In addition to the TV spot that first ran during the Patriot season opener on Monday Night Football, we targeted male customers through several mediums including print, billboards, kiosks, digital and the Web. We've recently seen a meaningful pickup in the demand for our expanded line of men's sneakers, casuals, boots and slippers.

Our UGG brand domestic wholesale business increased double-digits for the fourth consecutive quarter. I think it's important to point out that the growth of our U.S. wholesale business continues to come from higher door productivity versus new door growth. Our strategy of keeping distribution tight and going after more shelf space within our account base of better department stores, especially footwear retailers and kid independence is clearly working.

Through the ongoing evolution of our UGG line, we've succeeded in significantly increasing the average SKU count per door over the past several years, and now command more retail real estate including more than 350 shop-in-shops. In Europe, we've made good progress growing our wholesale business with distributors and more recently, through our subsidiaries. This quarter marked our first fall season selling directly to retailers in the U.K. Orders were up significantly on both the unit and dollar basis, and were noticeably more diverse than a year ago.

The transition to a wholesale model has also -- has allowed us to capitalize on the demand generated by our former distributor, and accelerate the UGG brand evolution beyond its classic roots to establish it as a luxury comfort brand. Much like we've been doing in the U.S., we've identified the right group of retailers to partner with us on this strategy, and made the decision to narrow U.K. distribution. Now this will help ensure that consumers are presented with a broader selection of merchandise, while also educating the population on just how deep the product line has become.

In the Benelux, we picked up where our former distributor left off. This market has been selling a diverse selection of product for several years, and the retailers response for this fall's new introductions has been positive.

In our distributor markets, which include Italy, Germany and Russia to name a few, we experienced solid year-over-year growth in the third quarter, driven by demand from multiple collections. Overall, we're pleased with our performance in Europe. We're obviously cognizant of the concerns about Europe due to the economic situations in several countries, and we'll continue to closely monitor sell-through as we head into the holiday period.

We've also expanded our business in Asia through direct operations in Japan and our joint venture in China. These are 2 of the largest luxury good markets in the world, and provide compelling long-term opportunities for the UGG brand. This is our third year of direct operations in Japan. And while the retail environment has been soft following the earthquake and tsunami in March, we're moving forward with the right mix of wholesale accounts in each of the major cities.

Expanding our company-owned retail locations has also been a key part of our Asia growth strategy, and we've opened 5 stores in Japan and 4 in China year-to-date. These new stores include our first boutiques, which are smaller versions of our full-priced concept stores and average about 1,400 square feet.

On a global basis, our Consumer Direct division delivered a very strong third quarter. Retail sales increased 72%, fueled by our aggressive store opening schedule in Asia, coupled with very strong comps. Same-store sales were up 15.4%, which follows a 23.6% increase in the second quarter, and comes on top of the 17.9% comp increase in the third quarter of last year.

Our U.S. stores again, outperformed versus expectations, while our stores in the U.K. have continued to improve after a challenging first quarter. It appears that the U.K. retail environment has stabilized following the implementation of austerity measures earlier in the year, and our outlook for the holiday season remains positive. And finally, our eCommerce business posted its fourth consecutive quarter of double-digit growth, driven by higher UGG brand sales on both our U.S. and U.K. websites.

I'll now turn it over to Tom.

Thomas A. George

Thanks, Angel. We had a great quarter in the third quarter of 2011, net sales increased 49.1% to $414.4 million versus $277.9 million in the third quarter of last year. Net sales of UGG products increased 47.3% to $376.7 million versus $255.8 million in the third quarter last year. Net sales of Teva products increased 7.3% to $14.7 million in the third quarter compared to $13.7 million in the same period of 2010.

Sanuk brand sales were $15.6 million in the third quarter. We began including the Sanuk brands operations effective July 1, 2011, our acquisition date. Combine that sales of the company's other brands decreased 11.7% to $7.4 million in the third quarter of 2011, compared to $8.4 million a year ago. Included in these numbers are global retail store sales of $34.7 million, up 72.1% from $20.2 million in the third quarter of 2010, driven by 13 new stores at September 2010, and a same-store sales increase of 15.4% for those stores that were opened for the full 3-month period ended September 30, 2010 and 2011.

Sales for eCommerce business, which are included in the brand sales numbers as well, increased 18.3% to $10.3 million in the third quarter, up from $8.7 million in the prior-year period. Also included in the brand sales numbers, domestic sales for all brands increased 26% to $257.9 million compared to $204.7 million in the third quarter of last year.

And international sales increased 113.8% to $156.4 million compared to $73.2 million in Q3 2010. International sales were 37.8% of total sales, up from 26.3% last year. Gross margins for the current quarter improved 1.9 percentage points to 49% compared to 47.1% in the third quarter last year. This increase was driven by direct distribution for the UGG brand in the U.K. and Benelux, and increased mix of retail sales, and is partially offset by a roughly 10% increase in product cost.

Total SG&A expense for the quarter was $112.2 million or 27.1% of net sales, compared to $64.6 million or 23.3% of net sales a year ago. SG&A increased primarily due to an increase in operating expenses related to our conversion to a wholesale business model in the U.K. and Benelux and additional expenses of acquiring and operating the Sanuk brand. In addition, third quarter 2011 SG&A includes additional marketing investments of $3.8 million, higher legal spend totaling $2.1 million, due diligence audit and transaction fees related to the Sanuk acquisition of $2.7 million, and $4.4 million in the amortization of intangible assets and purchase price accounting tied to the Sanuk earnout payment. The due diligence audit and transaction fees are one-time charges, while the amortization of earnout accounting will be ongoing at decreasing annualized amounts.

There were also 13 new retail stores that were not opened during the third quarter last year, and additional increases in variable expenses for the increased sales. Operating income for the quarter was $90.7 million or 21.9% of sales compared to operating income of $66.3 million or 23.9% of sales last year. Net income for the third quarter 2011 increased 48.3% to $62.5 million, compared to net income of $42.1 million in the third quarter of 2010. And diluted earnings per share increased 48.6% to $1.59 versus $1.07 in the third quarter last year.

Now turning to the balance sheet. Inventories at September 30, 2011 were $356.9 million compared to $197.3 million a year ago. By segment, UGG inventory increased $143.7 million to $324 million. Teva inventory increased 50.4% to $16.9 million, and our other brands inventory increased by $1 million. Sanuk inventory totaled $9.2 million at September 30, 2011. The increase in inventory at September 30, 2011, is primarily attributable to the growth in fourth quarter orders for the UGG brand, the warehousing of holiday inventory supporting the new wholesale European business, that was previously fulfilled by international distributors and the increase in retail stores compared to a year ago.

As of September 30, 2011, we had cash and cash equivalents totaling $90.4 million compared to $250.5 million at September 30, 2010. The decrease in cash and cash equivalents versus a year ago was primarily attributable to the cash payment of $126.6 million associated with the acquisition of Sanuk brand in July 1, 2011, combined with the increased inventories and receivables associated with the transition to wholesale operations in Europe.

At September 30, 2011, we had $45 million in outstanding borrowings under our credit facility compared to none at the same point last year. Accounts receivable at September 30, 2011, were $227.7 million compared to $142.2 million at September 30, 2010. The increase was attributable to increased sales and the conversions from distributor models to wholesale business models in certain European markets.

Now moving on to our outlook. Based on better-than-expected third quarter results, we are raising our fiscal 2011 guidance. We now expect 2011 revenues to increase approximately 33% over 2010 levels, up from our previous guidance of approximately 26% growth.

For the full year, we now expect UGG brand sales to increase by approximately 32%, up from our previous expectation of 25%. We expect Teva sales to increase by approximately 20%. For the Sanuk brand, we now expect sales for the second half of the year to be in the high $20 million range versus our previous guidance in the low $20 million range. And sales of our other brands are expected to be down by approximately 10% compared to 2010. We currently expect fiscal 2011 diluted earnings per share to increase approximately 22% over 2010 levels, up from our previous guidance of approximately 17% growth. Our forecast is based on a full year gross profit margin of approximately 50% and SG&A as a percentage of sales of approximately 29%.

As a reminder, our SG&A projection includes certain initial charges related to our transition to a wholesale business model in Europe, as well as additional investments in several key areas of the business that we feel are important to the long-term development and growth of the company. These include approximately $9 million of initial costs related to our transition to a wholesale business in the U.K., Benelux and France. Most of these costs were expensed during the first and second quarters are now behind us. Approximately $11.5 million of additional marketing and advertising spend to support the UGG brand's men's and women's prospect initiatives. Approximately $7.2 million of this has been spent year-to-date, with remaining $4.3 million budgeted for the fourth quarter.

A $7 million increase in our legal expenses, to further fund the protection of our intellectual property included in our trademarks, approximately $4.5 million of these costs were incurred during the first 9 months with $2.5 million remaining in the fourth quarter. Lastly, we have approximately $4.1 million in due diligence, audit and transaction fees associated with our acquisition of the Sanuk brand, most of which, has been expensed during the first 3 quarters.

The aforementioned investments, due diligence costs and deal fees totaled approximately $0.56 per diluted share. In addition, we have approximately $4.9 million of amortization expense related to Sanuk brand intangible assets and approximately $2.8 million of accretion expense related to contingent payments for the acquisition of the Sanuk brand.

Of this total, $4.4 million was expensed in the third quarter, leaving $3.3 million to be expensed in the fourth quarter 2011. Compared to 2010, our effective tax rate is expected to decline to approximately 31% in 2011, driven by the increased mix of international profits. Our capital expenditures in 2011, are expected to be approximately $60 million.

For the fourth quarter 2011, we expect revenues to increase approximately 29%, and diluted earnings per share to increase approximately 33% compared to the fourth quarter of last year. This guidance includes approximately $6.9 million or $0.12 per diluted share of incremental investments associated with additional marketing, amortizing spend and increased legal expenses. We're still in the planning stages and budgeting process for next year. Though consistent with past practice, we'll provide more specific 2012 guidance when we report our Q4 results in February. But we want to share with you some initial insights, particularly, as it relates to raw materials. Prices for our primary raw material, sheepskin, have continued to rise, as have leather prices, which often move in correlation with one another. After increasing 30% in 2011 over 2010, our sheepskin cost will be up another 40% in 2012. As we've discussed before, we have implemented programs to help mitigate the impact from higher sheepskin and raw material costs. These include selectively raising prices, increasing the mix of non-sheepskin product; exploring new footwear materials, new production technologies and U.S. production, and supply chain efficiencies such as reduced freight costs and others. We think some of these measures, along with the expected growth of our retail division and higher concentration of international sales, will help partially offset the increase in our cost of goods sold in the near term, while others will take more time before we see meaningful benefit flow through our P&L.

With regard to SG&A expenses, we expect to make additional infrastructure investments, primarily personnel, to support our multichannel growth strategies in Europe and Asia next year and beyond, as well as consider additional marketing expenses. In addition, 2012 operating expenses will include the noncash charges for Sanuk, amortization expense and earnout accounting of approximately $12 million.

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

Angel R. Martinez

Well, thanks, Tom. As you can see from our guidance, we're anticipating another strong fourth quarter. The recent acceleration and sell-through of the UGG brand at retail, combined with our inventory investments, has us well-positioned for the holiday season in the U.S., and in our direct international markets. Earlier this month, we opened 2 more stores in China, as well as locations in Toronto and Vancouver. We'll soon open our third store in London, followed by another 2 in Japan. This will give us 44 stores worldwide by mid-November, up from 27 at this time a year ago, with 19 in the U.S., 5 in the U.K., 10 in China, 8 in Japan and 2 in Canada. So it's shaping up to be another record year for the company. The UGG brand is on pace to surpass $1 billion in annual sales. The Teva brand is projected to report its second consecutive year of 20-plus percent growth. And our brand portfolio has never been stronger, thanks to the acquisition of the Sanuk brand.

At the same time, we're in excellent financial condition with no long-term debt, and a projected yearend cash position of approximately $250 million, with no short-term bank borrowing even after our purchase of the Sanuk brand and approximately $20 million in company stock repurchases.

Turning to 2012, the spring 2012 prebook process for the UGG, Teva and Sanuk brands went well. The UGG brand's spring line is expected to have a much greater presence at our domestic wholesale accounts next year, including sandals, espadrilles, boots, clogs and sneakers. The mix of closed toe footwear now comprises approximately 21% of the Teva brand's spring line, and will continue to be the driving force around the brand's continued market share gains in the outdoor space. The Sanuk brand was well into its spring selling period when we acquired it in July. Management has made good progress growing the prebook portion of the business, and this is evident in their backlog at September 30.

Overseas, the UGG brand spring line is still under-penetrated. We believe that our newly established subsidiaries provide a stronger platform to go after this large market opportunity. Likewise, our direct operations in the U.K. and Benelux are influencing the Teva brand's strategic direction in those regions, as well as neighboring countries like France.

Turning to retail. Our preliminary plans are to open approximately 25 new stores in 2012. The majority will be in international locations, primarily boutiques in Asia, with a store opening cadence similar to this year. Now we're obviously well aware of the potential headwinds that face the global consumer should the economic environment deteriorate further. However, we feel good about our prospects and our growth prospects at this point. The opportunities for our business have never been broader or more diverse, and we're confident that we have the right strategies in place to build on the global momentum that we've created.

So operator, we're now ready to take questions.

Question-and-Answer Session

Operator

[Operator Instructions]

First up is Jeff Klinefelter of Piper Jaffray.

Jeffrey P. Klinefelter - Piper Jaffray Companies, Research Division

A question for you first, Angel, on the UGG brand and pricing during the quarter and during the second half of the year, impressive gains. And I was just curious, either measured in your own retail doors or measured as you can tell through the wholesale channel, how much of this growth is coming from a positive mix shift, in terms of your ability to deliver higher price point products with in the mix versus just unit velocity? And then, I was also curious, just how much of the UGG growth, the men's product did consider given that it is coming off a small base? The one follow-up question for Tom, would be on the gross margin rate. You talked about some puts and takes to the margin this year and some cost -- incremental cost next year. How should we be thinking initial [Audio Gap] and all those things considered for next year? Are we looking at a down margin, just given that you've already benefited from the integration of the distributors this year?

Angel R. Martinez

Okay, let me take the first part, Jeff. Significant growth has come from the mix shift. We've had great success with the expansions of the brand beyond the classic category, which has been an important component of our strategy. Diversifying the product line. All you have to do is walk in the stores and see the kind of interest we have in non-classic product, that's actually quite extraordinary. Particularly, the cold-weather product, which has been very strong, and the sneakers have continued to perform well even through fall. So it has been, I think, more slanted towards that mix shift, that's where we're seeing a lot of growth. On men's side, we're very happy with the results of the men's initiative. We've had, I'd say, very solid low double-digit sales gains on the men's side, and momentum continues to build. I think we're just now seeing the weather begin to shift, and the season for boots and cold weather boots particularly, is starting to make itself known. So I feel that we're building some nice momentum on the men's side.

Thomas A. George

And Jeff, regarding the margins, one thing we do know is now, we know the increased raw material cost we expect to experience in 2012. And I think another thing we know right now is, which is 2012, which is different than 2011 as we don't -- we will not experience the same one-time lift we experienced in 2011, by going to these U.K. and Benelux markets direct in 2011. That benefit, for example, in the third quarter, was an approximately 5% benefit to the margin by going direct. So it's still early. Another thing is it's still early in our planning process to be able to come up with really, what the margins may be for 2011, because there are a lot of puts and takes. We're still finalizing our pricing. We're still finalizing for next year, what our mix of international versus domestic business will be. We're also evaluating and determining just what the number of retail stores which can help with the margin next year. So a little bit too early, like a sort of consistent with normal process in February, when we report our fourth quarter results, we'll be able to have a better view of margin guidance for next year.

Jeffrey P. Klinefelter - Piper Jaffray Companies, Research Division

Okay. Well, what will your total cost of goods rate increase be this year, Tom?

Thomas A. George

That's a good question. It is real similar to what it was in 2011. In 2011, we hit about 10% with the total cost of goods increase. And for 2012, at this point in time, it looks like it'd be real similar.

Operator

Our next question comes from Mitch Kummetz, Robert Baird.

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Let's see, I've got a few questions. I'll start on your Q4 guidance, I mean, obviously, a lot of moving parts of the business this year, especially with Europe but then also, Sanuk and new stores. Is there any way you can say what your organic growth rate assumption is in Q4, if you kind of strip out those incremental businesses?

Thomas A. George

I think you can get to that, Mitch. I mean, we talked about Sanuk being in the high 20s for the back half of the year in the first -- in the third quarter, Sanuk was a little bit over $15 million of sales. So if you strip that out of there from the growth rate that we're giving, then you can sort of back-end with an organic growth rate.

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

And Tom, on the last call, you talked about a $30 million shift coming out of Q3 to Q4, because of Europe. Is that still the case? And if it is, or even if it isn't, what does that turn into for Q4, based on the conversion from distributors to direct?

Thomas A. George

Yes, I think we -- again, in Europe, the fourth quarter business is very much dependent on reorders as opposed to being prebooked like the U.S. So, we're being cautious relative to our expectations in the fourth quarter in Europe and the U.K. until we get to our first full season and get a better understanding what kind of reorder rates there may be.

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then just to follow-up on Jeff's question about gross margin. I mean, You guys are on pace on your international business, I mean, that could be, I don't know, maybe close to $400 million this year, maybe a little less than that. I know at one point you guys talked -- but prior to this conversion, you talked about, I think the U.K. was about 40% of sales, Benelux, 15%. And when it's all said and done today on international, what will those 2 markets represent as a percentage of your overall international sales, do you kind of have an idea of that at this point?

Thomas A. George

Let us get you that. I mean, let me...

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

And while you're thinking about that, can you speak a little bit to the growth that you're seeing in Japan and China? And how much of that is contributing to the international? Or is it pretty much all coming out of U.K. and Benelux?

Thomas A. George

I'll give you -- the Japan market as well as the Chinese market are still relatively small. They're -- sort of an estimate for the total year, the Japanese market is about 2% to 3% of sales, while the Chinese market is 2% of sales for the total year.

Mitchel J. Kummetz - Robert W. Baird & Co. Incorporated, Research Division

Okay. And then maybe lastly, while you're thinking, if you can get those numbers on U.K. and Benelux, that would be great. But let's go on how you refer to the spring prebook, is there any way you could quantify that? It sounds like the prebook is coming in very strong, but is there -- maybe a number you could tie to that or percentage increase?

Angel R. Martinez

No, I'm not ready to do that. At this point, it's been strong, consistent with what we've seen in years past, with more penetration and more stuff. We're going more real state than we've had in the past. So the mix is very good. We're very happy with the mix. But I don't want to disclose any specific numbers at this point.

Thomas A. George

And Mitch, on Europe, let me give you quick number available. It's not just those 2 markets we're direct, but we have a good business in Germany and some of the other countries. So total European region is roughly 20% of total sales.

Operator

And from Barclays Capital, we'll hear from Bob Drubl.

Jessica Schoen - Barclays Capital, Research Division

This is Jessica Schoen on for Bob. I have a question about the inventory, I know you gave a little bit of detail about which brands contributed to the increase, but I was wondering if you could talk about the magnitude of the different buckets as far as, whether it's coming from the Sanuk brand or the increase in demand for UGG, how those contributed to the overall increase.

Thomas A. George

Yes. I can do that. Sanuk we'd put that out -- that's about $9 million. So a year ago, we didn't have that in our numbers. One of the big growth areas is internationally, now that we're direct, and that was about $60 million of the increase. And then another increase is we have more stores, that's $12 million the $15 million. And the balance would be domestic, and then something that really cuts across all that is, there's about a -- for the most part, a 10% increase in sort of the cost of inventory levels relative to a year ago -- cost increases we experienced.

Jessica Schoen - Barclays Capital, Research Division

Okay. And then, as far as comps by region, I know you said that the U.K., which had been trailing the U.S. has improved. Is there any more color you can give us on what comprised the 15.4% comp increase?

Thomas A. George

Generally speaking, the U.S. was stronger than the international markets. And that's probably the level of visibility we want to get right now, give right now. We have some improvement in the U.K. relative to what we saw earlier in the year. But we are seeing in Japan, and even to a certain extent, or lesser extent, China, we've got some impact there, but we still have a good outlook relative to Japan and China, relative to the retail opportunity there.

Jessica Schoen - Barclays Capital, Research Division

Okay. And then just finally on the outerwear and handbag business, if there's any comments you can make on that?

Angel R. Martinez

Yes. We really like the direction that we've with both of those businesses, as you may know, we've been incubating both of these, moving away from the original license relationship that we had in both businesses, to managing it and developing it on our own. I think this year, as you may have seen from the initial shipment of the handbags, we've made a dramatic improvement in the handbags. The apparel line, is a lot more focused with I think products that are priced right and make statements about the UGG brand. Clearly, one of the advantages of having these retail stores is that we have a fantastic laboratory for experimentation and development of both the apparel and the accessories line. And our team has been very good about identifying opportunities, putting them in the doors and seeing how they perform and then accelerating the development from there. So, I would say, we're probably still in that sort of early stage development of our apparel and accessories strategy, and you'll see more of that, and more acceleration in that over the next couple of years.

Operator

We'll now go to the Jim Duffy, Stifel, Nicolaus.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Question, Tom, on the fourth quarter guide. Revenue going from 22% to 29% growth, but EPS growth guidance going the opposite direction from $0.36 to $0.33. Help me understand the disconnect there?

Thomas A. George

Jim, with that -- some of that is, there are some expenses in the third quarter that shifted to the fourth quarter. But most of the change in the earnings guidance is related to that. And there's also, what we're seeing now for the fourth quarter is a little bit of a shift in mix, a little bit more of a movement towards the domestic versus -- business versus the international business. And that has some negative impact on the margin. But net-net, it's mostly due to a shift of expenses.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then, Angel, you've -- broaden the offering of UGG in the U.K. and Benelux. Can you comment on the sell through rates that you're seeing for the broadened UGG offering and U.K. and Benelux, and I guess for that matter other international markets?

Angel R. Martinez

Well, we -- and I can comment on sell through rates for spring, I think a little early at the moment to comment on the fall since the weather has been quite warm in the U.K. especially all through Europe. We really haven't seen -- real fall-like weather consistently. We have a ways to go with our spring product in Europe. The brand was known as primarily a classic brand, the UGG classic -- synonymous with winter, and we have some work to do there. I think sellthroughs were good, but they could be better with a little more insight about the product and the assortment, and the flow rate of those products and assortments, and we learned. This is only the first fall season that we've been selling product directly, and that we've gone to school on last spring's product, which we did not sell in. That was sold in by our distributor. So I think you'll see improvement across that front next year. So, we'll it's a little early to comment on the fall. We're getting good signals so far, with response to the initial shipments and -- of product, but it's still too early.

Jim Duffy - Stifel, Nicolaus & Co., Inc., Research Division

Okay. That's helpful. And then recognizing that your thoughts on '12 are preliminary, if you were to exercise price increases, what would the timing of those be? Would that be for the second half of the year? Is it too late at this juncture to implement those for the first half?

Angel R. Martinez

It'd be mostly second half of the year. It'd be related to our fall business, which obviously -- it's the lion share of the business.

Operator

Next up is Jefferies' Taposh Bari.

Taposh Bari - Jefferies & Company, Inc., Research Division

I just wanted to follow-up with you, Tom, on that fourth quarter guidance question. So, I'm still a little, I guess kind of confused about the outset there. So about a $25 million increase in your -- or $20 million increase in your revenue guidance, I get around $0.15 of better EPS, and the expense shift I think is around $0.02. I'm still trying to understand how you guys are guiding fourth quarter down versus your prior guide, if you can kind of help bridge the gap a little better.

Thomas A. George

May have been, in terms of your model and some of your expectations, but our prior guidance was more like a $3.09 kind of guidance, and we're coming in now, of course if you apply the percentages at roughly $3.02, and then $0.04 of that is relative to the expense shifts. So it's primarily due to the expense shift. And then, the other thing is when you have a change in mix, relative to what's international versus domestic, then you also get somewhat -- you get some pressures on the margin relative to the prior guidance, so...

Taposh Bari - Jefferies & Company, Inc., Research Division

Got you. Sorry, so I guess the composition of those $555 million changes pretty meaningfully then?

Thomas A. George

You may be looking...

Taposh Bari - Jefferies & Company, Inc., Research Division

Sorry.

Thomas A. George

Go ahead.

Angel R. Martinez

It's all right.

Taposh Bari - Jefferies & Company, Inc., Research Division

I wanted to ask also about the Sanuk charges. So it sounds like last quarter, you outlined about $4.9 million of transaction costs, which I believe were primarily in the third and second quarters. And now, it sounds like there are an additional $10.5 million worth of various charges. So were those originally in your third and fourth quarter guidance or are those new? Can you, I guess answer that first?

Angel R. Martinez

Those were originally in the third and fourth quarter guidance, and at about those full amounts, just a little bit lower than in original guidance than what we estimate those to be right now, and those are still being evaluated at this point in time as well. But that's sort of where we're at now, and what I talked about for 2012, or the approximate numbers we expect at this point in time.

Taposh Bari - Jefferies & Company, Inc., Research Division

Okay, that's helpful. And just final question that I had was just the cadence of your store openings this year. I believe last quarter, you said 12 in the third quarter and then -- I'm sorry, 2 in the third quarter, 12 in the fourth. It sounds like that's become more balanced. Is that accurate observation?

Angel R. Martinez

Yes. In terms of the fourth quarter of this year, we expect about 7 of the 17 for the total year. So we have balanced it out somewhere. But more of the store openings are coming sooner, so we can capitalize more on the full fall season as opposed to just the fourth quarter.

Taposh Bari - Jefferies & Company, Inc., Research Division

Okay. And just a final point on the -- on these new international stores that you're opening, are they all -- are the majority of them going to be these boutique kind of smaller square foot footprints types? Or are they going to kind of vary? I believe your U.S. stores are closer to that 3,000, 4,000 square foot prototype.

Angel R. Martinez

Yes. The boutique is more of an international concept, more of an Asian concept, but it won't be the majority.

Operator

And our next question will come from Chris Svezia, Susquehanna Financial Group.

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

I have a question, just, Tom for you. In terms of -- I'll take a stab at all of the assumptions you're making for fourth quarter comp, by any chance, you're assuming it slows in your guidance for the fourth quarter, just given the comparison and given your typical conservative stance?

Thomas A. George

Well, yes. In the fourth quarter, and especially -- not only do we have new stores, but our stores -- the comp base is still relatively small when you compare it to another larger retailer. So we -- and the macro backdrop we see around the world, we still try to be cautious from that point of view on what kind of assumptions we put in for comps.

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

Okay. So, kind of the low to mid single-digit assumption, is that fair, for the fourth quarter?

Thomas A. George

You go ahead -- whatever assumption you want in there. But -- another thing to keep in mind is now we have, for instance in New York, we have 3 stores there now, relative to earlier years. So you need to -- like especially with the macro backdrop, you need to be cautious where you take the comps.

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

Okay, fair enough. I think on -- you mentioned $250 million in cash at year end. Did I catch that correctly?

Angel R. Martinez

Yes.

Thomas A. George

Yes.

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

Okay. All right. And then, I'm curious just, Angel -- if you can just maybe elaborate a little bit. In the U.K., when you talk about, kind of looking at your existing door count, where you are, consolidating that door count, I guess how do we think about growth, I guess more importantly as you go into spring, because I guess most of it is -- is kind of in the bag at this point for the fall. But how do we think about that? Is it mostly coming from units? Is it coming from expanding the breadth of products, improved productivity of existing doors? I mean, do you actually expect to increase door count at all going to the first half of next year in the U.K.?

Angel R. Martinez

No, actually, we do not expect to increase door count. We think growth will come from all of the above. It just depends on the channel. There are some doors that are very heavily, strictly classic and very limited beyond that, which is not appropriate representation of the UGG brand. So it's kind of a one-dimensional view of the UGG brand. So therefore clearly, we want to expand beyond classic, we want to expand into the spring, we want to expand into men's and kids. So that's -- those are some doors. Some other doors, there's a relatively decent assortment, but there's been, inconsistency in continuing to evolve the categories of the products. So there's only a spot representation of the classification of the product versus other areas. So to give you an example, slippers. Slippers is a big growth opportunity in the U.K. starting to catch on. But we have not enough penetration of doors in the slipper business, and that's coming -- you'll see more of that. Men's is another area, where we're just starting to see some acceptance and development of our men's casual and casual boots and cold-weather product in the northern parts of Europe. And there, we have a lot of room to grow. So I'd say, if nothing else, what we have in the U.K. is probably a few too many doors, frankly. And there might be more consolidation, and an underdevelopment of the assortments in those doors. And so our team over there has got their work cutout for them, and they will be driving those growth objectives in the next 12 months pretty aggressively.

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

Okay. And then on Sanuk, I know in the last call, you talked about, it's a -- on an annualized basis 25% operating margin business. Any reason to think as you go into spring of next year, which I assume seasonally, it's strong operating margin in the annualized margin, that, that would change dramatically even if you make some investments in the business?

Thomas A. George

No, it shouldn't change dramatically even making investments in the business. And you're right, 1/2 of the year is going to have stronger operating margins than the back half for Sanuk.

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

That's great to hear. And then the last thing I just have here is, when you talk about 2012, and you touched on some investments that you plan on making in, staffing and marketing, I guess all in -- everyone is looking at the level of expenses and sort of one-time breakout, legal, marketing et cetera. It's $0.56, is there any way to maybe think about it, that the expenses and the acceleration next year, is it going to be anything close to that magnitude as we go into next year? Or is things like expanding sales staff more normalized with the growth of the business?

Angel R. Martinez

I think, the best way to look at this point in time, it's still early in our planning process, as we evaluate the number of retail stores we'll open, we continue to evaluate what kind of personnel we need to be able scale the company internationally and both Europe and Asia. When we continue to our planning process and get a better idea of what the requirements are going to be, we'll be able to share that in February.

Operator

Our next is Christian Buss, Credit Suisse.

Christian Buss - Crédit Suisse AG, Research Division

I was wondering if you could provide some perspective on the newly opened retail doors, maybe you open their productivity right now, how are you feeling relative to the historical model?

Angel R. Martinez

Sure. We're very happy. I think the doors that we've opened recently in the U.S. particularly in Europe have been performing as to the plan. Obviously, in Japan, they had a meltdown, tsunami, and that has been problematic. Curiously, we're getting great performance from the outlet store we opened this. And it's -- and the original store we had, which is a little hole in the wall, has been performing exceptionally well. But tourism has been away down in the Ginza district, and curiously as well, tourism from China is just now starting to bounce back. The Chinese consumer in Japan is very powerful driver of shopping in those districts. So we expect to see some improvement in the fourth quarter. We're not immune to the macroeconomic situation across any part of the world. Wherever you see a slowdown in general retail -- the odds are we're going to experience some less than stellar performance. But having said that, I'm constantly amazed at how well our stores perform because of the loyalty we have from consumers who really love the brand. And so, we expect that to continue -- with innovative product and more aggressive marketing in those retail locations.

Christian Buss - Crédit Suisse AG, Research Division

Could you also provide some perspective on your comfort with your inventory levels?

Angel R. Martinez

Yes. We're really comfortable with our inventory levels. We had the complicated business, now we're direct internationally, and we feel really good with our inventory levels, and the level of reserves we've put relative to the inventories and our ability to manage it.

Operator

Our next question today comes from Howard Tubin, RBC.

Howard Tubin - RBC Capital Markets, LLC, Research Division

Maybe just a follow up on inventory. Any sense of where you'll be at the end of the year in terms of percentage increase versus last year.

Angel R. Martinez

It will be, I think, if you look at it in terms of absolute numbers, I mean a year ago, our inventory was about $125 million all in. This year, we've got the cost increase in Sanuk. It's probably going to be about 60% increase year-over-year is sort of our expectation right now.

Christian Buss - Crédit Suisse AG, Research Division

Got it. Okay. And then, sorry if I missed it, but did you say what the domestic UGG wholesale business in the third quarter was, how much that was up?

Angel R. Martinez

Yes. In the third quarter, the domestic UGG wholesale business was up 17.5%.

Operator

Next up, we'll hear from Diana Katz, Lazard Capital Markets.

Diana Katz - Lazard Capital Markets LLC, Research Division

I was wondering if you could talk a little bit about the UGG's kid product and any initial copyrights there? And then also if you could discuss Teva in the quarter and then what you're seeing in terms of spring bookings?

Angel R. Martinez

Spring bookings for Teva or...

Diana Katz - Lazard Capital Markets LLC, Research Division

Yes, for the Teva.

Angel R. Martinez

Okay. Well, UGG Kids, I think if there's any breaks that are being put on adult kids are being put on by us, I mean, we could sell a lot kids product, a lot of more kids products than frankly we feel is healthy. So, we're keeping the kid assortment very fresh, very directed, very focused, and being careful about our distribution. As well, it's expensive product for kids, so we're conscious of that, and conscious that families are struggling, and we don't want to get ahead of ourselves in the kids businesses. Remember, it cost the same practically because the cost of sheepskin to produce a kid's boot as in adult boot. On the Teva business, we're very happy with the sell-through of the closed-toe product, and that has proven to be very important, very powerful driver for the brand. Once again, we're anticipating 20-plus-percent increases around Teva brand for this year. And we feel it's on a nice trajectory. Spring bookings, were just exceptional, very happy with that. We anticipate a lot of fresh new product, a lot more spread and assortment of Teva and a significant amount of closed-toe in the spring, which is for Teva, really a first. So, breaking new ground with Teva every single season.

Diana Katz - Lazard Capital Markets LLC, Research Division

That's great. And then just with UGGs, in terms of all these new categories you've branched out, and so you've mentioned strong sellthrough rates in sneakers and in cold-weather product, are any of the categories that you've run into not working or are you happy with all the categories right now?

Angel R. Martinez

We're pretty happy with all the categories. The way we operate, it's always -- there's always something exiting the line and something new replacing it. So, where we don't feel we get the successes, that product doesn't really progress very far. And we're also careful initially when we make a decision and put something in line. We do test it. We get a read before we go all in. We don't bank -- bet the farm on any particular new style. It's a very systematic approach. Our stores are very helpful in this respect, cause we're able to get a good read and get a read early. So it's -- I'd say right now, we're getting good sellthrough across the board. There's few items here and there, but they're not of any significant volume and inventory commitment. And there are items where we consciously know that because of the price point, that they're more less exclusive items. They're limited distribution, limited production and those items are actually selling quite well. And when we run out, we run out.

Operator

We have time for one more question today. It comes from Scott Krasik, BB&T Capital Markets.

Scott D. Krasik - BB&T Capital Markets, Research Division

Just a couple around cost and prices. So the 40% increase, Tom, is that locked in now for the full year all of your sheepskin needs for next year?

Thomas A. George

Yes, it is.

Scott D. Krasik - BB&T Capital Markets, Research Division

Okay. And then, just remind me, because I know you're at 10% cost of goods increases, overall, what was your total average price increase this year, and are you considering something similar for next year, greater or less?

Angel R. Martinez

Yes. I mean, we're still evaluating what pricing we're going to do for fall of '12. At this point in time, we are going to raise prices on selected styles, but we need to finalize that as part of our process here, as far as the planning process. This year, again, we raised it on selected styles, some of the newer products, we raised it, but for example, this year, with the 40% increase in sheepskin cost, that's going to be difficult from a pricing point of view. You really can't offset that kind of a cost increase.

Scott D. Krasik - BB&T Capital Markets, Research Division

Right. And I'm also concerned, I mean, you said that you got, was it 500 basis points from the subsidiary switch positive into the third quarter?

Angel R. Martinez

Yes, that's the benefit we had in the third quarter for that switch, which will not recur next year.

Scott D. Krasik - BB&T Capital Markets, Research Division

Okay. All right. That's helpful. And then, Angel, we had head from some domestic customers, both department stores and retailers, that they were taking shipments later, they are breaking up their shipments into the fourth quarter to space themselves out to keep the floor fresh, did that move the needle in terms of your business and is that in fact what you saw? .

Angel R. Martinez

No, not really. If anything, I think what's -- what people are reacting to as well as the weather. And so that's having an impact on when they might want to take deliveries. Some people want to shift their deliveries a little bit later because we really haven't had the cold weather. They don't want to sit on too much an inventory. It's just now -- it's now starting -- this happens every single year. Every year, we have a warm spell in October, and people somehow believe there's not going to be a winter. And then last coldest winter ever, and they were scrambling for product in November, December and January, so it's just impossible to predict, and we feel we have a pretty good flow chart for our customer's needs and demands on inventory and product, so and a good historical reference for all that. So it's just the normal part of running the business.

Scott D. Krasik - BB&T Capital Markets, Research Division

Okay. And I guess, just last Tom. How much if any U.K. reorder business do you use to ship to the distributor is considered in the fourth quarter guidance now?

Angel R. Martinez

Just skip back to the concept, to the $30 million turns into $50 million kind of concept. And last year, in the third quarter, there was $30 million of distributor business, and that converts to about $50 million, that was in fact, that was a second -- the second moving into the third. We had $30 million of distributor business that was on a distributor base, that would $50 million, but with -- and with the change in model, it was $70 million. So that's in the third quarter. In the fourth quarter, we've got really -- again like I said were really a cautious estimate on what kind of reorder business we'll have in the fourth quarter in these 2 markets at this point in time. We want to get though our first winter season in these 2 markets on a direct basis, then we'll have some experience there.

Scott D. Krasik - BB&T Capital Markets, Research Division

So there is a chance that, that could come in that's not incorporated into the guidance?

Angel R. Martinez

Right. Thank you all very much. Really appreciate your attention and the questions. I'd like to also thank the team, the Deckers team worldwide, and we've, I think, demonstrated an ability to react to changing economic conditions and keep evolving these brands and anticipate some nice growth in 2012, and we'll see you in February.

Operator

Ladies and gentlemen, that does conclude today's conference. Thank you all for your participation, and have a great day.

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