Deckers Outdoor's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Deckers Outdoor (DECK)

Q1 2012 Earnings Call

April 26, 2012 4:30 pm ET

Executives

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

Zohar Ziv - Chief Operating Officer

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

Analysts

Robert S. Drbul - Barclays Capital, Research Division

Omar Saad - ISI Group Inc., Research Division

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

Jeffrey P. Klinefelter - Piper Jaffray Companies, Research Division

Diana Katz - Lazard Capital Markets LLC, Research Division

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

Howard Tubin - RBC Capital Markets, LLC, Research Division

Christopher Svezia - Susquehanna Financial Group, LLLP, Research Division

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

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

Christian Buss - Crédit Suisse AG, Research Division

Presentation

Operator

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Deckers Outdoor Corporation First Quarter Fiscal 2012 Earnings Conference Call. [Operator Instructions] I would like to remind everyone that this conference 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 the company's expectations, beliefs and views about its future financial performance, brand strategies and cost structure 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, capital expenditures, brand strategies and cost structure, as well as the outlook for the company's markets and the demand for its products. The forward-looking statements made on this call are based on currently available information, and because its business is subject to a number of risks and uncertainties, some of which may be beyond its 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 from 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, Angel Martinez. Please go ahead, sir.

Angel R. Martinez

Well, thank you to everyone for joining us today. With me on the call are Chief Operating Officer, Zohar Ziv; and Chief Financial Officer, Tom George. Our first quarter performance reflects the evolution of our business model and the external factors that we believe have pressured both sales growth and margins, particularly the differences in weather and sheepskin prices versus the same period a year ago.

The Sanuk brand, the newest addition to our portfolio, started the year off very well. Strong sell end of the spring line has been followed by equally strong sell-through at retail in March and April. At the same time, wholesale orders for the UGG brand spring styles were up meaningfully versus a year ago as was sell-through in our Domestic Stores. Sales of the Teva brand expanded close -- Teva brand expanded close sale offering, also delivered solid gains. Unfortunately, very mild temperatures, along with a tough comparison created by the cold and snowy conditions across much of the U.S. at the same time last year, had a noticeable impact on boot sales during the first quarter. Despite these challenging conditions, we believe that we've done a good job managing inventory and adjusting our purchase orders. We expect to enter the fall selling season in good shape with relatively clean channels.

In terms of our bottom line performance, earnings were down approximately 59% versus a year ago, which is primarily attributable to the increase in sheepskin prices, together with the increase in operating expense from our growing retail organization. As we have previously indicated, sheepskin prices are up 40% in 2012 from 2011. Zohar will speak more specifically about the outlook for sheepskin prices in a moment, but they do appear to be coming down from their historic highs, which should provide relief beginning in 2013. And we do expect to get better leverage on our retail expense over the full year driven by the fourth quarter when that channel typically generates more than 50% of its annual revenue and more than 90% of its operating income.

So let's look at each brand's performance in more detail. For the UGG brand, as I mentioned, we believe that the extended period of warm weather throughout the first quarter has adversely impacted cold-weather UGG brand boot sales. However, we also believe that the UGG brand continues to make important inroads, developing a more meaningful spring season business. I think it's helpful to look at the Q1 performance of our casual spring footwear in boots separately from our cold-weather boots as there was a meaningful difference between the 2 categories. Our expanded spring line of sandals, sneakers, wedges, fabric boots and Mini Bailey Button did very well across each of our channels including wholesale where our spring styles were up close to 20% and have continued to gain important shelf space.

Speaking specifically about the domestic wholesale channel, the growth in spring styles and men's was offset by a decline in cold-weather boot sales. January and February are typically big boot month at retail, but as a result of the mild temperatures in many parts of the country, boot orders were down year-over-year. With regard to fall, we are close to completing the pre-book period, and overall, we are pleased with the current level of commitments from our domestic wholesale accounts. Slippers, classics, fashion, casual boots, sneakers and casuals all booked well. Coming off of warm winter, retailers, in general, typically take a cautious approach to next season at this point in the year. So while the open-to-buy dollar pool has contracted a bit. Based on conversations with our retailers, we believe the UGG brands percentage of the total open-to-buy dollar pool has not diminished and that the brand, especially in the back half of the year, remains as important, if not more important, to the retailers with whom we do business.

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