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Executives

Angel Martinez – President, Chairman and CEO

Tom Hillebrandt – CFO

Analysts

Mitch Kummetz – Robert W. Baird

Jeff Klinefelter – Piper Jaffray

Jeff Mintz – Wedbush Morgan

Todd Slater – Lazard

Chris Svezia – Susquehanna Financial

Howard Tubin – RBC Capital

Sam Poser – Sterne Agee

Robert Gotsch [ph] – Nat Capital [ph]

Deckers Outdoor Corporation (DECK) Q2 2008 Earnings Call Transcript August 7, 2008 4:30 PM ET

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Deckers Outdoor Corporation second quarter fiscal 2008 earnings conference call.

At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue for questions. (Operator instructions) I would also like to remind everyone that this conference call is being recorded.

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

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

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

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

Angel Martinez

Thank you. Good afternoon to all of you and thanks for joining us. With me on today’s call is Zohar Ziv, our Chief Operating Officer, and Tom Hillebrandt, our Chief Financial Officer.

The second quarter was another period of exceptional growth for our company with net sales increasing nearly 73% to $91.1 million compared $52.7 million last year. As we stated in our earnings release, we recorded a noncash pretax charge in the second quarter of $14.9 million reflecting the write down of intangible assets related to the Teva trademark. Excluding the impact from this write down, diluted earnings per share rose 129.4% to $0.39 in the quarter compared to $0.17 in the quarter a year ago.

Despite the ongoing challenges facing the US economy and its impact on consumers and the retail environment, all our brands posted positive gains in the second quarter. Sales of UGG products more than doubled increasing approximately 131% to 60.6 million compared to 26.3 million a year ago. The UGG brand’s performance was highlighted by a significant increase in shipments to our international distributors. Also contributing to the brand’s strong results was solid sell through of spring product on our website and in our company owned retail stores.

The second quarter has historically been our smallest in terms of sales volume; however, it is growing in terms of importance as UGG has become a true year round brand as evidenced by sales of UGG product in the second quarter exceeding those in the first quarter. Historically, we have shipped all product overseas during the second quarter beginning in May and June. We are now finding that there is more demand in the US for fall product in June and our domestic customers are scheduling deliveries earlier as consumers are now purchasing UGG boots, slippers and casuals on a year round basis.

Based on our pre-booked orders, we are forecasting strong growth across the board for UGG. With our twin faced boots, casual boots, including our metropolitan and surf collection as well as our cardy boots and our slippers for men, women and children leading the way. We’ve grown our business with our existing customers by expanding spread and assortment. Our customers have embraced our expanded product offering that includes 140,000 fall 2008 versus 125,000 fall 2007. We’ve also expanded our cold weather collections, which are showcased beautifully in our national ad campaign shot on location in Banff and Lake Louise, Canada.

This fall, we’ll have over 40 shop-n-shops with key domestic retailers, which is up from none in the second quarter of last year and only 10 shop-n-shops in the second half of last year. We also will have 30 shop-n-shops overseas this fall compared to only 7 last year. These displays which typically carry more than 80 different SKUs have similar look and feel to our UGG concept stores and showcase the breadth and depth of the line.

We’ve also increased our marketing investment to support our broader print campaign that will run nationally in Vogue, Teen Vogue, Vanity Fair, Glamour, Lucky and o. The national ads begin this month in August Teen Vogue and September Glamour, which have hit the newsstands already. We’ve also expanded our outdoor advertising in key cities in the US including New York, San Francisco, Chicago, Los Angeles and San Diego.

As I mentioned earlier, the second quarter has always been meaningful for the UGG brand internationally as we ship fall deliveries to our distributors in Europe, Asia and Canada. This quarter we witnessed a triple digit gain in international sales driven by demand for our entire fall assortment from markets such as Canada, the UK, Benelux and Germany. The UGG brand’s recent performance abroad gives us a heightened degree of confidence that the global prospects for the brands are significant.

Turning to Teva. Second quarter sales increased 4.8% to $25.2 million versus sales of $24.1 million a year ago. As everyone is aware, the retail environment has been extremely challenging due to a number of economic factors. Therefore, while Teva sales rose only modestly in Q2, we are pleased by its performance and encouraged by our ongoing efforts to reposition the brand and target a younger, more active consumer.

Importantly retailers are echoing our sentiment as they continue to tell us that Teva is holding its own versus the competition and is one of a handful of footwear brands to watch in the outdoor space. Sales in the second quarter were primarily driven by a significant fill in business as retailers across the board remained very cautious with future orders choosing to chase business as it materialized. Many of the new styles that were standouts in the first quarter continue to show strength as we entered into summer. These include the Westwater, Kayenta Fossil Canyon and Omnium, just to name a few. Also Mush and Olowahu, Mandalyn Wedge and the Terra-Fi performed well, so there was a healthy mix of new and heritage styles.

Our business at REI is worth specific mention. As you may recall, Teva was chosen to be part of the brand campaign program where it along with a handful of other premier brands were highlighted throughout REI stores for a two week span in June. The results were better than expected and we currently are exploring similar opportunities to partner with other key retailers in a similar fashion.

Internationally, our new distributor in China opened two Teva standalone stores in Beijing and Shanghai during the quarter with approximately 15 shop-n-shops planned for the remainder of 2008. Early reports suggest that the stores are exceeding expectations.

Simple second quarter sales rose 94% to $4.7 million compared to $2.4 million a year ago. Simple has been gaining strong momentum over the past year as more and more consumers are discovering the brand and making an emotional connection with its unique and compelling sustainable product offering. Sell-through of ecoSNEAKS during the quarter was strong across all distribution channels, such as department stores, specialty shops, the Internet and independents.

The successful sell through of the spring ecoSNEAKS collection for men and women is attributed to new styling and fresh colors and materials. Green Toe which is the beacon of the entire Simple line also reported solid growth this past quarter with the introduction of new summer silhouettes for women. We also experienced positive momentum with the introduction of our first infant collection. We see opportunity in both the infant and the kids market where there is a void for sustainable footwear.

Late in the second quarter, we shipped the initial orders of Planet Walkers. This new collection of sustainable comfort leather casuals for men and women is being introduced through an exclusive launch with The Walking Company and all 200 of their doors. Planet Walkers is being supported through The Walking Company’s six-week Think Smart, Be Planet Friendly promotion in partnership with the Sierra Club and smart USA, the makers of smart card. Distribution of Planet Walkers will be opened up to select influential independent accounts later this month.

Also this quarter, we opened the southeast division of whole foods and now sell the brands in approximately 85 of their locations. In June, we also launched women’s ecoSNEAKS programs with REI in all 80 of their doors.

Simple’s marketing efforts remain focused on communicating that we are the world leader in sustainable footwear and accessories. This message is being delivered through an extensive print campaign in magazines such as Lucky, Teen Vogue, Details and Wired, as well as through an aggressive online advertising campaign which is resulting in enhanced brands awareness and an increase in Internet sales.

Turning to our direct consumers business, e-commerce sales for the company increased more than 30% to $6.4 million for the quarter. Unique visits to all our websites continues to increase as greater awareness for our brands is driving more and more consumers to seek out our products on the web. Meanwhile our retail sales for the second quarter of 2008 rose 143.2% to $3.1 million compared to $1.3 million last year. For those stores that were opened during the second quarter of last year, same store sales grew by 59.4%. These results were especially rewarding given the current state of the retail environment. We believe the performance of our UGG concept stores in New York and Chicago as well as our five outlets underscores the strength of the UGG brands and the growing demand for its diversified product line.

We move ahead excited about our expansion plans which include the opening of an UGG concept stores in San Francisco next week, another in the Upper West Side in New York in late October and two stores in London. We plan to open the first London store in late October at the Westfield Mall and the second London location in late November in Cubbon [ph] Garden.

Over the past several months, we’ve made a handful of important announcements that will strengthen our market position and enhance our global prospects. First, we completed our acquisition and integration of the Tsubo brand including closing the US office in Carlsbad and transforming all of the back office operation to our platform. Those of you not familiar with the brand, it is a high end style comfort oriented brand utilizing athletic performance components and high end materials that appeal to a metropolitan consumers base worldwide with price points between $70 and $200. They are primarily sell through the same type of retailers as the UGG brand. In addition, it has a small but fast growing Internet business. Our plan is to re-launch the brand with a new marketing campaign in fall of 2009, and to build the brand to a meaningful business.

Secondly, we finalized our joint venture for the UGG brand in China with Stella International. We are very excited about this initiative as we believe China represents a very compelling long-term opportunity for us. Equally important we’ve been doing business with Stella for more than 12 years and they’ve been operating over 100 stores under their own brand. As a result of their experience combined with a unique proposition that the UGG brand offers to Chinese consumers, we feel confident that this is the right platform for launching the UGG brand in this market. Our first UGG store is expected to open in Beijing this fall.

Lastly since June, the new automated pick module has been operating in our Camarillo distribution center which will give us the ability to more than triple our daily output from that facility.

I will now turn the call over to Tom to review the financials.

Tom Hillebrandt

Thank, Angel.

I will start by mentioned the international sales that are included in the brand sales numbers that Angel took you through. International sales for all of our brands increased 131.8% to $34 million compared to $14.7 million in the second quarter of last year and domestic sales increased 50% to $57.1 million compared to $38 million in 2007. As a percentage of sales, international sales were 37.3% in Q2 of 2008 compared to 27.8% last year.

Our gross margin for the current quarter was 39.9% compared to 41.1% in the second quarter of last year. The year-over-year decline in our gross margin was primarily attributable to the increase in international sales during the second quarter. As a reminder, sales to our international distributors carry a lower gross margin than our domestic sales. And our previously issued expectations for full year gross margin remain at 45%.

The total SG&A expense for the quarter was $28.4 million excluding the impairment charge which I will discuss later or 31.2% of net sales compared to $18.8 million or 35.7% of net sales a year ago. The planned increase in SG&A expense for the second quarter was due primarily to higher sales and marketing variable cost related to the increase in sales and two new retail stores that were not opened in the second quarter 2007, higher share based compensation costs and additional distribution center costs related to our expansion in December 2007. On a gross dollar basis, we expect SG&A will increase in the second half with an increase in sales, additional international cost related to our expansion and additional executive hires that we previously discussed.

Interest income was approximately $0.6 million in the second quarter compared to last year’s second quarter interest income of $1.5 million. The decrease was the result of lower interest rates versus a year ago, as well as a shift in the mix to safe lower yielding investments. As stated in our earnings release, for accounting purposes, we recently conducted an impairment evaluation of Teva intangible assets on our balance sheet. The current challenging economic environment that the Teva brands faces has negatively impacted our ability to attain the revenue projections we had previously established for the Teva brand. We still believe there is growth potential for the brands with the economy as it is today has forced us to move out of growth rates by a few years.

We previously stated that we believed that the Teva brand could generate $175 million of annual sales by 2012. We are revising that guidance and now expect Teva brand annual sales of $140 million by 2012.

Our projected inability to reach our 2008 sales target along with the reduced long term forecast for sales growth were indictors that the intangibles were possibly impaired which led us to perform a detailed accounting valuation analysis of the intangibles. The accounting valuations showed that the goodwill was not impaired but the fair value of the trademark was significantly below the carrying value of the intangibles on our balance sheet and therefore we recorded a noncash pretax charge in the second quarter of $14.9 million reflecting the write down of the Teva trademarks.

On an after-tax basis, the impairment charge was $9 million or $0.68 per diluted share. Excluding the impact of the impairment charge, net income for the second quarter was $5.2 million or $0.39 per diluted share compared with $2.3 million or $0.17 per diluted share in the second quarter of last year.

Turning to balance sheet. At June 30, 2008, our overall inventories increased $112.8 million versus $66.3 million a year ago. By brand, UGG increased $38.6 million to $90.6 million, Teva increased $2.9 million to $14 million, and Simple increased $3.7 million to $6.9 million. The addition of the Tsubo brand in the second quarter added $1.1 million in inventory.

As we said before, the majority of UGG brands business in pre-booked and the increase in UGG inventory is necessary to fulfill the volume of orders currently on the book. We now expect UGG brand sales for the year to increases approximately 53% up from our previously guidance of 37%.

Another way to look at this is through a simplified example. Our full year total company forecasted gross margin is 45%. That means that for every dollar sale, the cost of sales is $0.55. Looking at it the other way around, every dollar of cost of sale translates to about $1.80 of sales. If you apply that general relationship of $1.80 in sales for every $1 cost of sales to the $38.6 million increase in UGG inventory, the resulting amount would represent less than 60% of the expected increase in UGG brand sales for the second half of the year. Given our current visibility, we feel very comfortable with our overall inventory levels.

In addition, at June 30, 2008, we had cash, cash equivalents and short-term investments totaling $124.8 million compared to $96.6 million at June 30, 2007, and accounts receivable were $54.7 million compared to $30.2 million at June 30, 2007.

Moving on the outlook, based on better than expected second quarter results coupled with our heightened outlook for the UGG brand, we are raising our 2008 guidance. To reiterate, we are increasing our fiscal 08 guidance by the amount we exceeded Q2 plus our increased expectations for the back half of the year. Let me go through the specifics. We now expect revenue to increase approximately 43% over 2007 level, up form our previously guidance of approximately 31% growth. We also now expect diluted earnings per share excluding the impairment charge discussed earlier to increase approximately 34% over 2007, up from our previous guidance of approximately 27% growth. Again, this is based on our better than expected second quarter results and improved visibility based on the currently pre-booked. This guidance also assumes our previously issued expectations for gross margin of approximately 45% in 2008 and SG&A as a percentage of sales of approximately 23%, excluding the impairment charge discussed earlier.

In addition our fiscal 2008 guidance includes approximately $10.6 million of share based compensation expenses which is an increase of approximately $4 million over 2007 and $1.8 million higher than our previous guidance. We are currently working on our 2009 plan and updating our five year long range plan. For guidance purposes, we are assuming that at the conclusion of this plan in process, we will have a long range plan that shows we will achieve our long term incentive plan level two targets that were established back in May of 2007. Therefore we would have to record additional share based compensation expenses beginning in the third quarter. Our guidance assumes an additional share based compensation expenses of $1.7 million in Q3 and $0.3 million in Q4.

We’ve not previously provided specific guidance with regard to the third and fourth quarter, so we will do that now. For the third quarter, we currently expect revenues to increase approximately 34% and diluted earnings per share to increase approximately 12% over the third quarter of fiscal 2007. Our forecast is based on a gross profit margin of approximately 44% and SG&A as a percentage of sales of approximately 23%. The increases in Q3 SG&A on a year-over-year comparison is based on the same reasons as the increase for the second quarter of 2008 which were additional distribution costs, higher share based compensation that I just mentioned and cost for new retail stores that were not opened in the third quarter of 2007.

For the fourth quarter we currently expect revenue to increases approximately 45% and diluted earnings per share to increase approximately 42% over the fourth quarter of fiscal year 2007. Our forecast is based on a gross profit margins of approximately 47% and SG&A as a percentage of sales of approximately 18%. For the full year, as I mentioned earlier, we now expect UGG brand sales to increase by approximately 53% while Teva brand sales are now expected to be flat to slightly up and Simple brand sales to increase by approximately 37% over 2007. Teva brand sales for 2008 are expected to be less than $5 million.

I will now turn the call back over to Angel for some closing remarks. Angel?

Angel Martinez

Thanks, Tom.

Well, as we head into the back half of the year we remain fully cognizant of the challenges in the environment. We also remain confident about our prospects. As previously mentioned, we are raising our outlook for the year due in part to a better than expected first half of 2008 and more importantly due to our heightened outlook for the UGG brand for the second half of the year. During a period when our industry is dealing with a slowdown in consumers spending and retailers are managing their businesses tighter, we are experiencing an increase in future orders as buyers are dedicating more and more of their open to buy dollars to UGG brand products. At the same time, we continue to carefully manage supply to ensure that retailers remain profitable selling UGG brand product. Most importantly, the UGG brand is still a relatively small brand on a worldwide basis, which we believe has significant growth potential, while the Teva and Simple brands are both making important progress towards achieving their strategic objective.

I want to thank our entire team for their ongoing hard word and dedication. Their passion for the business is at the heart of our success and we move forward energized, focused and committed to driving long term growth and increasing shareholder value.

Operator, we’d now like to open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) And we will go first to Mitch Kummetz with Robert Baird.

Mitch Kummetz – Robert W. Baird

Yes, thanks and congratulations. Couple questions and then just couple housekeeping items. First off, looking at the sales guidance for the back half, you are obviously expecting stronger sales growth in Q4 than Q3, is that mainly a function of retailers taking deliveries earlier this year so you had some business flow out of Q3 into Q2?

Angel Martinez

Yes, exactly. We have pretty much across the board retailers wanting UGG product at least a month earlier than prior years, and that really indicates the brand’s success at diversifying its product assortment and becoming a year round brand.

Mitch Kummetz – Robert W. Baird

And then on the gross margin outlook, obviously you are modeling gross margins down I think a little over 100 basis points in the back half. I know that in the past you’ve always been very conservative with your gross margin assumption based on not knowing what closeouts might look like in the back half. Could you just talk – is that still the assumption for the drop in gross margin or are there some other factors that are coming into play here and could you talk a little bit about now that you have your orders for the back half, basically you kind of know what your sales are going to be, have orders for those sales, what might happen to where you would end up with some closeouts, it just seems like closeouts at this point would be unlikely since you have orders for that inventory?

Tom Hillebrandt

Hi, Mitch. This it Tom, I will take that. And the answer is you kind of touched on in the beginning of the question. Yes, we continue to be conservative on our estimate of expectation for possibility for closeouts and some discounting in the second half and we are being consistent with our expected full year gross margin. We’ve been seeing 45% all along and continue to stick to that.

Mitch Kummetz – Robert W. Baird

But there is a – I guess I am still trying to get a better understanding how might you end up with closeouts at this point in the year when basically the inventory you have I assume you have orders for all of that inventory, is it just being conservative that you might get some cancellations or –

Angel Martinez

Given this economy you just don’t know what you are going to get. So yes, there is a possibility of cancellation if things tank even further. We also have inventory we’ve set aside for fill-in business where we do try to chase a little bit in key styles. And so you assume that if you’ve healthy sell-throughs you’d be able to move through all of that inventory. So, we really do try to err on the conservative side on that front.

Mitch Kummetz – Robert W. Baird

Okay, that’s helpful. And then again just key housekeeping items, could you – international business I know you mentioned international is up triple digits in the quarter, could you give us a number for international or percentage of sales in the quarter ?

Tom Hillebrandt

It was – for the quarter, international sales for the quarter were 37% for the quarter.

Mitch Kummetz – Robert W. Baird

Okay, 37%. All right. Okay.

Angel Martinez

Long term, we’ve been driving towards our international business representing 30% of our revenue, so we continue to strive towards that.

Mitch Kummetz – Robert W. Baird

And then on the interest income line, can you maybe speak to what you think that comes in for the year? And then also lastly on our hare count, you guys in your press release your diluted share count is the same as your basic but obviously you had a positive pro forma earnings, so what kind of share should we be using to get to that $0.39 for the quarter?

Tom Hillebrandt

There should have been a reconciliation –

Mitch Kummetz – Robert W. Baird

I will look for that.

Tom Hillebrandt

– table at the end of the earnings release. There is a reconciliation of non GAAP measures and that table kind of basically kind of walks you through from the GAAP number to the non-GAAP number and has the share counts in there.

Mitch Kummetz – Robert W. Baird

And then the interest income, do you expect that to be down from year ago in the back half just based on what you said?

Tom Hillebrandt

Yes, I would anticipate that our yields again would be down. I mean that’s what happened in the second quarter here, as well as we kind of moved the mix a little more conservative portfolio which again had lower yields, and so I would anticipate it would be down a little bit from last year.

Mitch Kummetz – Robert W. Baird

Okay, that’s all I have. Thanks and good luck.

Angel Martinez

Thanks, Mitch.

Operator

And we’ll go next to Jeff Klinefelter with Piper Jaffray.

Jeff Klinefelter – Piper Jaffray

Yes, congratulations, everyone, on a great quarter. Just a couple of questions, one on Teva first, could you just talk a little bit more on a long term basis on about the brand? You’ve reduced your long term outlook for it, yet you’re still having some successes at retail, could you just talk a little bit about why you’ve decided to lower that bar and where you are may be falling short of what might have been a bigger brand in the future?

Angel Martinez

I think if we look at what’s impacting Teva, more than any other factor it is the economy and the fact that retailers are pulling in their horns and focusing on those brands that in the last several have generated revenue and created the bulk of the sell through and thus the open to buy dollars. So people are a bit risk averse, and Teva’s product right now, there’s a lot of new product which is performing quite well. The good indicator for all of this is that the new product is selling through. In many stores, we are selling through at double the sell through rate of our competition. So, we are more than holding our own. In many stores, our product new product are in the top ten sellers of the footwear, the outdoor footwear, so we remain quite bullish on the long term prospects for Teva.

One of the things I really don’t want to do is keep the bar so high that in order to make up the gap that this year sort of creates, we have to make some distribution decisions that we wouldn’t want to make just to chase a number. I think that while Teva is a strong, authentic outdoor brand with I believe great growth potential as performance product, we now look at it and realize what the growth of UGG, it now represents 14% of our total business, which obviously has less of an impact than it would have had several years ago. So, my goal is really to kind of take that pressure off the team so we can continue to grow the brand, the new product and quality marketing and good distribution.

Jeff Klinefelter – Piper Jaffray

Okay. And then on UGG, there are some concerns that you are going to hit a saturation point here shortly, that you haven’t really been adding new doors, you don’t typically talk about specific door counts, but your growth has come I think largely from additional SKUs in existing distribution and then higher productivity, higher sell through rates. Can you talk about with this level of success, how do you keep building on that and where does the average price point go versus the number of units per existing door or will you look at some new distribution in 2009 to help continue the growth rate?

Angel Martinez

I mean fundamentally you have to look at our order book and understand that most customers – well, I would almost tell you all customers, are not getting anywhere near the amount of UGG that they would like to receive. There is still much more demand for the product than we are capable of fulfilling. So, that’s part one. Part two is eventually, there will come a point where we feel that the US market will be mature and our growth overseas is going to be a driver for the brand. We’ve been lining up that opportunity now for several years. We anticipate through the success we’ve had at key markets like the UK and Canada and Benelux and we hope to see similar type of success in Germany and China, that the growth for this brand has some pretty long term – long legs on it. You have a hard timing finding the brand in most of Europe and Asia, Demand for the product continues to grow in the United States, we get a lot of consumers from Europe and Asia in the US buying product and bringing it back for their friends and family, for themselves. So it’s – we’re long ways form tapping this brand out to that place. I mean you’ve to look at brands. I remember a conversation once when I was with Reebok, we were at about a billion dollars and eventually we got to 3.5 billion, Nike is at 14 billion and the similar conversation about 1 billion shoe, so we’d go aren’t you saturated, haven’t people had all their running shoes they need or the aerobic shoes they need, I think there is a bigger market for comfortable type of product than there is even for aerobic fitness and running shoes. So, my feeling is that if you understand the brands and what it does for people we’ve got a very big long term potential here.

Jeff Klinefelter – Piper Jaffray

Okay. And then lastly on sourcing, lots of concerns about the pressure coming out of China, not only for raw materials but also for logistics, can you address that at all for this year. It sounds like largely locked in but going into ’09 what is the dynamic right now with your sourcing?

Angel Martinez

We manage that process pretty well as you know. We’ve made an investment in talent and people in our China office. We plan and work very closely with our factory partners. We have customers in the US wanting their product earlier, that’s good because it allows us to do a better job of scheduling our production. If everything came in here at the same time, A, that could happen and, B, the factories couldn’t accommodate it. So, we are now getting the feeling we have to through our growth of new styles, growth of a year round approach to the brands, we are able to really flow product and flow production on a 12 month basis much better than what we were doing. That’s taking a lot of the pressure off of factories, allowing us to really manage our costs in a more effective way, and I think that’s really been a key. In addition to that, we are doing a better job with information systems and scheduling production, et cetera, and Zohar and his team have been working very hard on that. So, this is a business we are in, we have to mange this. This is true of everybody in a similar kind of business, I think we do it quite well and we are getting better at it all the time.

Jeff Klinefelter – Piper Jaffray

S, but more specifically on inflation, I mean a lot of the people at the tradeshows and other companies talk about mid to high single digit inflation just across the board coming through and most trying to push it through with price point increases, but are you dealing with a similar industry dynamic?

Angel Martinez

Everybody is in the same boat and we’ve been anticipating this for a while, so we’ve been very selective about price increases. We haven’t done anything across the board, we’ve been selective in products that we felt we’d be able to accommodate a price increase and other products that we felt that we’re really stressed, we tried to forestall that. So, this is not a surprise to us, we’ve been managing through it and anticipating it, and I think again I think we’ve done a pretty good job at f that, but everyone is in the same boat. I mean there’s no way out of it.

Jeff Klinefelter – Piper Jaffray

Yes, thank you. Appreciate it.

Angel Martinez

And we’ll go next to Jeff Mintz with Wedbush.

Jeff Mintz – Wedbush Morgan

Thanks very much, and Angel, my congratulations as well. Angel, can you talk a little bit about the plans for the second half in UGG and outside of the boot business or outside of the footwear I guess and kind of where we should be looking for in terms of other categories for this fall?

Angel Martinez

Well, I think for this fall, again we’ve been developing non-classic and alternative product, a cold weather product which is I think had a great reception. Our slipper business has done well. If you step outside of footwear, we’ve already launched our bag collection and that’s continuing, we are doing that, I think better than we have in the past. Outerwear down the road is going to be another area for us for this brand to develop itself. It is important though that we are still driven by the footwear. I mean that’s really that’s what we do. Over the next few years as we continue to evolve and develop these other opportunities, the cold weather accessories by the way have done well every single seasons and it continued to do well. So, it is a bit of (inaudible) statement and in those market where consumers have a full breadth and assortment of the brand, these things are important to round out the presentation. We’ll continue to develop those.

Jeff Mintz – Wedbush Morgan

Okay, great. And then it sounds like you said that retailers want UGGs a month earlier and I know that your slipper business is kind of coming a year round business. I mean how do you kind of see that playing out in 2009 and beyond. I mean should we start to expect to see less seasonality in your product and perhaps more – even more product being sold in the spring as opposed to the fall?

Angel Martinez

We’ll continue to develop our first half business, our spring business. We think that that’s just – the response to it has been so great, we’ll continue to drive. We have exciting new stuff coming for spring ’09 as you’ve probably seen. It’s the seasonality, will we sell more in the fall than in the front half. Yes, we will. We will always do that. I would anticipate we’d probably remain at somewhere around 70-30. Could we eventually get to 60-40 fall to spring? Yes, maybe. That’s not a driver for us, however. I think we are – if retailers want the product earlier, it’s because they are able to sell and it’s performing, and it’s not that we are in some way trying to over manage the mix. We have good demand for our spring product now and slippers as you mentioned are year round business for us which is a huge accomplishment from where we were a couple of years ago. So, stability in the mix is important, a lot of creativity in the styles and the materials, et cetera, is what creates that type of stability and we’ll continue to do that.

Jeff Mintz – Wedbush Morgan

Okay, great. And then turning to inventory – back to inventory I guess for second, obviously a lot of that inventory is committed to orders, can you just give us a sense of where your uncommitted inventory is this year versus last year? I mean are you taking a more aggressive inventory position in UGG than you were last year at this time?

Angel Martinez

No, it’s consistent.

Jeff Mintz – Wedbush Morgan

Okay, great. And then just one quick housekeeping issue, maybe Tom you have this, do you have the number of pairs and the average selling price in the quarter?

Tom Hillebrandt

I don’t have that, but the 10-Q will get filed on Monday, that you should be able to get in there.

Jeff Mintz – Wedbush Morgan

Okay, great. Thanks, very much.

Operator

And we’ll go next to Todd Slater with Lazard.

Todd Slater – Lazard

Thanks very much, guys. A few questions, I want to start just on the pricing front for a moment if I may. We noticed obviously some price increase in some of the UGG line, I am just wondering how much overall sort of the average are prices up on your wholesales for the quarter and what do you see for the back half?

Angel Martinez

I would probably – I mean it’s probably around 5% I would say in an aggregate. I think that’s the way to look at it. As I mentioned, it is not across the board and you’ve probably seen some prices – we’re very selective as to where we feel that the price increase is appropriate. But we have no choice on some of these things. These are costs going up as was mentioned earlier, largely driven by the price of fuel. I mean these factories have to operate – it’s much more expensive, keep the lights on, and last not to mention the HR cost involved in these large facilities, so that’s about 5%.

Todd Slater – Lazard

Have you seen any change in velocity in terms of sell through of those items?

Angel Martinez

No, no we haven’t.

Todd Slater – Lazard

Okay, that’s good to hear. And I wanted to just go back to comment earlier you made about retailers, still even with the inventory that you have, you still said that retailers are on allocation, are not getting the full boat. I am just wondering if you feel you are still undersupplying the market demand this year even given where your inventories are? And based on your current sell-throughs, do you think you can – you will have any need at all to chase any products in the second half?

Angel Martinez

Well, you know the under supply is always a question, it is a fine balance as to where you need to be with the amount of product in a market. You can cross the line, and it’s like going to a restaurant and eating too much like last night. I didn’t come – I wasn’t feeling very good, and I think it’s really important that we always work with our retailers to understand what is an appropriate level of growth for the brand in their stores to assure that they for the long term have a profitable UGG business and they are not in a battle with everybody else in the mall who is over inventoried. So, we manage that very closely. It’s part of why we’ve been successful in the last few years. And we’ll continue to do that and it’s also effectively necessary because the factory capacity, et cetera, we don’t want to lose quality. So, factories can only ramp up at a certain rate and we’ve been consistently working with them to meet that middle ground. I’ve always said that we could sell a lot more UGG that we do, I could do that, Connie could do that by picking up the phone. But that’s not in the long term health of the brand or of this company in total. So, we have a long way to go with this brand and just ask anyone who owns the product, they are pretty excited about what’s coming for fall.

Todd Slater – Lazard

Your inventory turnover has been much higher than the industry average, clearly you’ve been very successful at conservative management. I am just wondering if this year you think your inventory based on what you have now, what sort of inventory turnover are you expecting this year?

Angel Martinez

We don’t expect it to deviate much from last year.

Todd Slater – Lazard

Okay, because it was pretty high last year.

Angel Martinez

Still we’ve had excellent early selling on our products with a variety of retailers who’ve got fall in and had a lot of great indicators out there, plus we know that we have demand from our website and all that stuff. So, we really feel like we are in pretty good shape.

Todd Slater – Lazard

Well, that’s a good segue sort of to international because did I hear correctly that the quarter you had 37% of the sales in the second quarter was international?

Tom Hillebrandt

Yes, that’s correct.

Todd Slater – Lazard

Okay, that seems like a very unusually high number, I know it skews a little to Teva, Teva is a little more mature internationally. But what should – what does it tell you about the international business in the second half, what type of mix do you see there? Are you gaining more traction there than you thought overall?

Angel Martinez

We are definitely gaining traction and a lot of the momentum that is driving that is UGG business, the product that we had for spring, and anticipation of the new fall line. We are just getting based on last year’s performance in the UK and Benelux, Switzerland, various other markets, we had excellent sell through. People ran out of products and there is a lot of excitement over the new product – the men’s product, the kid’s product. Now keep in mind, we still have a very under developed men’s business and a very under developed slipper business for example in Europe. They are just starting to get this whole idea of house shoes, we don’t want to call them slippers, those are house shoes over there. So, there’s a lot of potential in that component, in that piece of it for ongoing growth in the second quarter, particularly as we move down the next couple of years.

Todd Slater – Lazard

Well, just kudos again on the way you’ve been growing this business in a very, very rational way.

Angel Martinez

Thank you.

Tom Hillebrandt

Thanks, Todd.

Operator

And we’ll go next to Chris Svezia with Susquehanna Financial.

Chris Svezia – Susquehanna Financial

Good afternoon everyone and again congratulations, great job.

Angel Martinez

Thanks, Chris.

Chris Svezia – Susquehanna Financial

I guess, Angel, maybe if you could just clarify a point here. On the Teva business as you guys look at your inventories being up 26%, and you kind of infer from your guidance which you are looking out on an annualized basis, it looks like growth could be roughly 5% to 7% or so, somewhere in that range in the back half, how should we look at the repetitive [ph] inventories being up 26% relative to the growth, is it just more at once or how should we be looking at that inventory position and what’s the risk there?

Angel Martinez

We really – fundamentally, we have too much Teva inventory right now. We are going to be aggressively moving through that inventory. The reason that inventory exists, unlike the UGG business, Teva’s business isn’t as heavily pre-booked. So, we are anticipating fill-in business like we had last year and I think that’s kind of fallen short given the economy. Also keep in mind as we said last time, this has been a horrible weather year for – we haven’t had sustained warm weather, particularly in the northeast it’s been pretty tough. So, all those things have conspired to give us a bit of an inventory issue with Teva. But we’ll move through that, I think we are in pretty good shape there. Again, it’s a brand which is very healthy in terms of its product mix. The product is all fresh and new and it’s not a consumer driven issue, it’s creating a little bit of a back up there.

Chris Svezia – Susquehanna Financial

Could you separate by any chance between I guess the spring and summer product which is I guess sitting in the inventory and the reception to sort of the fall product which you are shipping? I am just trying to get an idea of –

Angel Martinez

Yes, it’s almost all spring summer product. The fall product, we just started shipping that, and we’ve had good response to that. We anticipate it will be the best fall that we’ve ever had, but it’s not a big number, the fall season for Teva yet, so most of what’s there is spring summer product.

Chris Svezia – Susquehanna Financial

Tom, a question for you, maybe if you – as you look at the difference between the third and the fourth quarter, you talked about the UGG business growing roughly 53% or 54% for the year, and obviously a reference to an earlier question about a possible shift in terms of product maybe flowing through the second quarter in terms of really shipment, can you give us a little help in terms of how should we look at the UGG business in the second half in terms of growth between the third and fourth quarter, obviously fourth quarter being bigger, but maybe you can just help us out a little bit on how we should look at that?

Tom Hillebrandt

Yes, we haven’t given the quarterly splits for each of the brand on the growth, but clearly from a total growth standpoint, fourth quarter is higher growth rate than third quarter.

Chris Svezia – Susquehanna Financial

Okay. And then just on the SKU count if possible for UGG, I know Hill, you’ve mentioned the SKU increased for fall ’08 versus ’07, any color at all for spring ’09 year-over-year in terms of the SKU increase for the UGG business?

Tom Hillebrandt

I think it’s pretty consistent with what it was last year, we are not up much. We’ve done great job of managing the SKU assortment. So, I think there is going to be – you know what we do just so you understand, with our brands. And let’s take UGG for example, we build around a core assortment. So, when we add a SKU, it’s based on the success of what came before it. We tend to be pretty lean with new product when we come out with it, and when we have success, for example, the cardy for example, that’s when we may add a few colors because we know that we’ve got a success on our hand. So spring line will be that kind of thing. We’ve got some very nice sandals and warm weather shoes that are built on the success of last year’s product?

Chris Svezia – Susquehanna Financial

Okay, alright. Thank you very much gentlemen, I appreciate it.

Angel Martinez

Thanks, Chris.

Operator

And we’ll go next to Howard Tubin of RBC Capital.

Howard Tubin – RBC Capital

Hi, guys. Great, really super quarter. Just a couple of question, one or marketing, maybe just some detail on how your marketing plan differed this fall season than what you did last fall, what’s increased, what’s decreased?

Angel Martinez

As I mentioned, the number of shop-n-shops that we are doing has increased pretty dramatically, that was in the strategy. And our opportunity is that we can get more spread and assortment in front of consumers, make a better brand presentation and then augment that presentation that we feel with visibility in key publications, key magazines. The other thing we’ve done is the outdoor program has gained momentum. We’ve got some great billboards in key locations around the country. If I can go for example here in Los Angeles, there is a great UGG billboard as you drive into the parking facility, and that’s pretty much a permanent UGG billboard.

So, those things work and we continue to do what works. We are really not frivolous in our marketing spend, we are pretty basic. I am a big believer in retail presence for a brand like UGG. I think that’s the key driver is that interaction you have with the brand at retail and retailers love that too. That’s where we are putting our money to enhance their facilities, to enhance their store, and that’s working and working well. So, it’s not brain surgery, it’s pretty cut and dry on the marketing front.

Howard Tubin – RBC Capital

Got it, thanks. And any – how many retail stores do you plan on putting up next year in 2009, do you have that number yet?

Angel Martinez

No, we haven’t put out a number for that yet, Howard.

Howard Tubin – RBC Capital

Okay, and then the final question is just in terms of all that cash we’ve sitting on your balance sheet any – are you still kind of out there looking for acquisitions, are you okay now with what you’ve done, or any chance – I guess you can’t buy stock back or may not want to buy stock back, but would you consider a dividend or anything like that?

Angel Martinez

We are still out here looking. I mean I think that given this economy, given this situation that unfortunately people find themselves, there could be some pretty good things coming down the pipe, and I think we are in a good position to take advantage of that if something should emerge. I’ve said for quite a while now, we will keep our powder dry until the right lifestyle brand opportunity comes by. You know, Tsubo, very small brand with great potential. I think we were able to bring that brand on board pretty successfully, it’s almost a dry run for something if we were to do something else, it could be something bigger. We now have the team successfully integrated a brand into the mix and I think we’ve done a great job with that. So, we’re open-minded and we’re keeping our eyes open out there. So, I haven’t seen anything yet though. We are not jumping out to bid about anything. I think the situation could be beneficial to us as the next few months roll by, there could be some good brands out there.

Howard Tubin – RBC Capital

Okay, great, thanks.

Angel Martinez

Thank you.

Operator

And we will go next to Sam Poser with Sterne Agee.

Sam Poser – Sterne Agee

Hi, it’s Sam Poser. Nice quarter. I wanted to follow-up on the inventory, with the $90 million of inventory that you currently carry in the UGG business and looking back historically, it looks like you have more than the next three months supply based on the guidance, and I am just wondering what was the thought process of bringing that much in so early?

Tom Hillebrandt

One of the reasons we are bringing in inventory earlier this year is just with the growth and demand and sales with factories and their ability to produce things, we’ve had to bring some things earlier than we have in the past to meet the demand.

Sam Poser – Sterne Agee

But that seems to be on a relative basis based on the percent increase not totally reflected in the guidance of the UGG business for the balance of the year.

Tom Hillebrandt

I am not understanding why you say that?

Sam Poser – Sterne Agee

I mean the inventory was up significantly, it was up higher percentage than your guidance for the back half says your UGG business will be?

Tom Hillebrandt

The dollars were up just under $40 million, they are up $38.6 million.

Sam Poser – Sterne Agee

And as a percentage, that’s much higher than the back half guidance for UGG, so I am wondering we’ve heard that the demand as you said is quite good, apparently extremely successful Nordstrom sale as well as other retailers we spoke with at the recent shoe show commented how well the product was moving. How much of that is built in? I mean is that really as much as long a supply as it appears to be or how conservative is this guidance?

Tom Hillebrandt

But if you looked at that increase, it still wouldn’t be enough to hit the second half sale.

Sam Poser – Sterne Agee

Normally it would get you comfortably through the next three months, the whole quarter?

Tom Hillebrandt

Right, but we’ve got the fourth quarter as well coming up too. And I am sorry Sam, I am not following you.

Sam Poser – Sterne Agee

Last year – I am sorry to drag this out, but last year your inventory – you’ve done a great job of managing your inventory, the sales, and sort of from a looking backwards basis, the inventory has been a very good predictor of what the sales has been, and the inventory on the simplistic basis has been around 90 – has been about (inaudible) about 93% of sales for the following quarter, and right now its significantly higher than that. And so essentially going into – out of Q2 where Q3 actual revenue is significantly higher than the inventory reflected preceding that quarter.

Tom Hillebrandt

Right. We’ve got a 53% increase in the sales this year which from a dollar standpoint is a much larger increase than in the past.

Sam Poser – Sterne Agee

That 53% increase equates to about $171 million, is that correct – $173 million?

Tom Hillebrandt

Over last year?

Sam Poser – Sterne Agee

Yes.

Tom Hillebrandt

Yes, that’s about that.

Sam Poser – Sterne Agee

And so if you just take the cost of goods related against that, the inventory even there your inventory appears to be high. Now the demand is there, so I am wondering what the outlook really is as far as unheld – you had mentioned the state of the economy and so on, but I say that the economy is terrible, you can’t buy a Prius, and I look at the way the UGG boots are selling, it is a Prius, hard to get hold of it.

Tom Hillebrandt

Right, but you are not going to run the inventory to zero and then you still – as you get into the fourth quarter then you’ve got the spring products coming in for shipping in the first quarter. So, there is some base level of inventory to take it to that extreme, exactly what’s on the balance sheet, the $91 million right now would be all specifically just third and fourth quarter is kind of over simplifying it.

Sam Poser – Sterne Agee

Let me ask – I am sorry.

Angel Martinez

Sam, we have – I think we have demonstrated over the last couple of years that we can manage inventory pretty well. We’ve got a lot of pretty high powered people who live and breathe this every single day. And on top of that, we’re conservative. So, it is one of those things. We sit here all day and talk about those various merits of one approach versus another and understanding our inventory situation. I am very comfortable that we have the appropriate level of inventory to meet our business objectives and grow our company. I am not a risk taker when it comes to inventory. I’ve been in this business too long and I know that the one thing that’ll kill you in this business in inventory. We have the orders against the inventory and that’s a real driver for decision-making about how much inventory we really need around here. So, if I were uncomfortable, we just wouldn’t buy the shoes, and that’s really how we really all operate. This is a very complicated process that we manage very effectively and we do it quarter in and quarter out and we’ve got a lot of good track record with the UGG brand over the last few years in doing that.

Operator

And we will go to Robert Gotsch [ph] with Nat Capital [ph].

Robert Gotsch – Nat Capital

Hi, good afternoon. Just on the pre-orders or the pre-bookings, is there any policy regarding either cancellations or mark down monies or returns or things of that nature?

Tom Hillebrandt

Well, there – the pre book orders, they are not 100% guaranteed, so there is potential, the full disclosure, there is potential for cancellation, but we haven’t noticed any increase in cancellations.

Robert Gotsch – Nat Capital

Right. On the international sales, just with regards to what’s going on in the UK, perhaps you can maybe discuss year-over-year performance in different regions?

Tom Hillebrandt

We haven’t – on the international sales I guess that’s 37% for this year, but we haven’t split it down specifically between countries. When you looked at for the increase Europe and U.K., we are a big part of the increase in the second quarter.

Robert Gotsch – Nat Capital

And do you – could you discuss anything regional in the US?

Angel Martinez

We continue to see growth in the Northeast, the Midwest. We are starting to see because of the spring product assortment, growth in the Southeast and the warmer climate states. When you look at our business historically, and you see California has been the driving market of our business, people often ask me how well do you think UGG could sell in a warmer climate. And I just point to Southern California where there has been historically a huge number of UGG products sold, and it’s pretty warm climate here. So, I think for us, it’s been garnering the belief by retailers that we have a year round brand with UGG and that’s been proven now by performance at retail and through the sell through and that’s now given retailers confidence that they can expand to their southern tier doors or we have retailers in southern tier states that are bringing UGG in and starting to perform with it.

Robert Gotsch – Nat Capital

Thank you very much.

Angel Martinez

Thank you. This will be the last question.

Operator

This does conclude today’s question and answer session. I would now like to turn the call back over to our speakers for any additional or closing comments.

Angel Martinez

Thank you very much. We really appreciate your time today. I know all of you have multiple calls to be on. We continue to drive toward our goals. As you can see, we are not letting up for a moment. We struggled due the economic realties like everybody else and I think that we have some wonderful brands and some wonderful people here who are yielding great results for our shareholders. So, thank you.

Operator

This does conclude today’s conference. We appreciate your patience, and you may now disconnect.

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