Zohar Ziv - Chief Operating and Chief Executive Officer Peter Worley

Ladies and gentlemen, welcome to the Deckers Outdoor Corporation Fourth Quarter and Fiscal 2007 Year-End Earnings Conference Call. At this time, all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. Instructions will be provided at that time for you to queue up for questions. If anyone has any difficulty hearing this conference, please press *0 for operator assistance at any time. I would like to remind everyone that this conference call is being recorded. Before we begin, I would also like to remind everyone of the company’s safe harbor language. Please note that some of the information provided in this call will be forward-looking statements within the meaning of the Securities laws. These statements concern Deckers’ plans, expectations, and objectives for future operations. The company cautions you that a number of risks and uncertainties beyond its control could cause Deckers’ actual results to differ materially from those described on this call. Deckers has explained some of these risks and uncertainties in the Risk Factor section of its Annual Report on Form 10-K and its other documented files with the SEC. Among these risks is the fact that the company’s sales are highly sensitive to consumer preference, general economic conditions, the weather, and the choice of its customers to carry and promote its products. Deckers extends that all of its forward-looking statements in this call will be protected by the Safe Harbor Provisions of the Securities Exchange Act of 1934 as amended. 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 and CEO, Angel Martinez. Please go ahead sir.

Good afternoon to all of you and thanks for joining us. With me on today’s call is Zohar Ziv, our Chief Operating and Chief Executive Officer. As you saw from our release, we ended 2007 with very strong fourth quarter performance as revenues increased more than 56% to a record $194.2 million, and diluted earnings per share rose to a record $2.69. Our results were driven primarily by another excellent holiday season for the Ugg brand. Sales significantly exceeded our expectations, increasing approximately 62% to $178 million versus $110 million in the fourth quarter a year ago. We experienced very robust full price selling across the entire Ugg line including our core boot business, our women’s surf fashion and Metropolitan collection, our slippers, our men’s casuals, and the kids’ styles. We reported meaningful gains in all regions of the country with particularly strength in the northeast. Outside the US, UK continues to be our fastest growing market, while Canada and Benelux region also contributed nicely to our international results. And finally our consumer direct business, which includes both the e-commerce business and our retail stores, was up significantly compared to the prior year period. For Teva, fourth quarter sales were on plan, while Simple’s performance was highlighted by strong sales of ecoSNEAKS across the majority of accounts. Now for the year, fiscal 2007 was also highlighted by record financial results with sales of $448.9 million, up 47.5% from $304.4 million in 2006 and diluted earnings per share of $5.06, up 53.3% from non-GAAP diluted EPS of $3.30 in 2006 before taking into account the 2006 adjustments from the restatement related to our China subsidiary and the impairment loss attributable to the partial write-down of our Teva trademark. In addition, we improved our balance sheet, finishing the year with more than…

Thank you Angel. For the fourth quarter of 2007, net sales increased 56.2% to $194.2 million versus $124.4 million for the fourth quarter of last year. Including sales from all sales divisions as well as the consumer direct business, our net sales for Teva products increased 6.2% to $13.9 million in the fourth quarter compared to $13 million in the same period of 2006. Net sales of Ugg products increased 61.8% to $177.7 million versus $109.9 million for the fourth quarter of last year. Simple brand net sales increased 76.2% to $2.6 million for the quarter versus $1.5 million in the same period last year. Included in these numbers are e-commerce sales for all 3 brands of $23.9 million, up 60.6% from $14.9 million in the fourth quarter of 2006 and retail store sales of $12.1 million, up 160.8% from $4.7 million in the prior year period. Also included in the brand sales numbers - international sales for all three brands increased 71.1% to $16.5 million compared to $9.7 million in the fourth quarter of last year, and domestic sales increased 54.9% to $177.7 million compared to $114.7 in 2006. Our gross margin for the current quarter was 48.2% compared to 48.3% in the fourth quarter of last year. Our margins remain high due to the robust full price selling and low inventory write-downs for the Ugg brand. Our SG&A expenses for the quarter were $36.7 million, or 18.9% of net sales, compared to $23.3 million or 18.7% of net sales a year ago. The increase in SG&A expenses in absolute dollars for the fourth quarter was primarily due to increases in our performance-based compensation expense related to our higher results as well as commissions. Our operating margin for the fourth quarter of 2007 was 29.3% of net sales, compared…

Thank you Zohar. We are obviously coming off a very strong year of growth for the Ugg brand; however, as I said earlier in the call, we believe it’s a relatively underdeveloped brand globally, particularly in terms of unit sales. Looking ahead, we not only see significant room for expansion in the first half of the year as the spring line is developed across the board, but considerable opportunity to drive greater sales volumes during the back half of the year, with a much broader assortment of footwear and greater floor space at retail. This spring, we are introducing a more evolved product line with 25% styles than a year ago, featuring a larger selection of espadrilles, flats, and updated versions of our luxury sandals and comfort slippers. Continuing with the trend from the fall on holiday season, you will definitely see a greater abundance of fashion and color in the line this spring, including more heels and wedges. Our men’s category will be a key focus in 2008, s we debut several new styles of footwear under our casual, comfort, and rugged collection for everyday use. We are confident that our brand equity and leadership status in luxury and comfort combined with current opportunities to raise the level of excitement in the men’s footwear category leaves us well positioned to capture key market share in the years ago. Recently, we previewed our entire fall await line, and the response from the retailers was again very strong. The line is more complete than fall ’07, as we have significantly enhanced our men’s offering and infused our women’s collection with new colors, additional materials, and greater functionality—presenting consumers more reason than ever to add either their pair of Ugg to their closet or an additional style to their wardrobe. Globally, the…

Thank you. The question-and-answer session will be conducted electronically. If you would like to ask a question at this time, please do so by pressing * key followed by the digit 1 on your touchtone phone. If you’re using a speakerphone, please make sure your mute function is turned off to allow your signals to reach our equipment. Once again, please press *1 on your touchtone telephone, and we’ll pause a moment just to assemble the roster. Our first question comes from Jeff Klinefelter with Piper Jaffray.

Yes, thank you. Congratulations guys on a fantastic year.

Thank you, Jeff.

Just a couple of quick ones; you provided a lot of great detail for us, but in terms of Q1, given the 25% top-line growth, Zohar, you gave us some good brand detail on an annual basis in terms of growth, but anything more you can share with us in Q1 and Q2 in terms of Teva. Last week, I heard from you we were looking at double-digit bookings for the Teva product. Just curious as we have gotten into the first quarter, maybe you had some sell-through data from the southern markets—what that looks like? Is any part of your more conservative bottomline guidance for Q1 related to reserving for any potential margin compression that may result from a slower channel for Teva?

Well, we have from our retailers so far, and it’s still very early. We’re pretty satisfied with the sell-throughs that we are seeing especially in the new products that’s been out there. Certainly, we’ve got a long way to go in the season. We expect that perhaps a very tough winter will yield a better spring, but I certainly can’t predict that.

Jeff, as to the margin compression, as you know, Q1 is mainly to sell in, Q2 will be the sell-through, so any margin compression if there will be any will be in Q2.

Okay, I guess back to the question regarding the growth rate of Teva. Can you give us any better clarity on that 25% growth in Q1? What are you looking for from Ugg versus Teva versus Simple?

Well, we are not breaking down to percentages on a quarterly basis, but in macro, you will see that the Ugg and Simple growth should be proportionally higher than Teva.

We also are getting very good response to the fall-away product line, which if you look at Teva’s business historically, there are great outside in fall, and the response to the closed toe footwear particularly shoes like Mountain Scout has been exceptional. We have that product virtually in every order, so I think that’s a nice upside for Teva expectations.

One last thing on Teva. When would you have a good read for the potential reorder business? Are you going to be able to tell that toward the end of the first quarter or when does the season truly begin on a national basis?

I think that’s probably in the first quarter—late March/early April. That’s when we should start seeing the impact of better weather on consumers getting into spring mode.

In terms of your international business and the distributors, there are distribution agreements that come to a close here over the next couple of years for several regions. Anything that we can expect to see in 2008 in terms of taking back or acquiring those distributions, and is that factored into the current SG&A forecast?

No, you are not going to see any change to the distributor structure in 2008.

Okay. Just likely, a lot of questions on sourcing and costs, and could you share with us your outlook with respect to sheepskin clearly for the Ugg product but sourcing of raw materials overall, and what you’ve factored in terms of inflation?

Regarding 2008, all our cost prices are already fixed, and we agreed to them with the factories, so we are not anticipating any cost increase either in raw material which is mainly sheepskin for us, or in the production cost.

Okay, great. Thanks guys. Good luck.

Thank you.

Our next question comes from Mitch Kummetz with Robert Baird. Please go ahead.

Thanks. Let me add my congratulations.

Thanks Mitch.

Let’s see. I have a few questions on the guidance—specifically the margins, and Zohar, I think you mentioned in your prepared remarks SG&A sort of mid 20s as a percentage of sales. As I kind of work through the numbers that you’ve given on sales and gross margin and even tax rate, I’m coming up with something that’s below that—sort of 22% to 23% on the SG&A. I’m wondering if I’m doing my math right here.

No, you’re correct. You’re in the right range.

Okay, that’s helpful, and then I also thought that you’ve taken some people by surprise with the Q1 guidance, and obviously it seems to be an SG&A situation, and Q2 is even a smaller revenue quarter. I don’t know if this might be an opportunity for you guys to maybe just make a comment or two about Q2 so that maybe we don’t run into a similar situation that we’ve run into here.

If you’re referring to Q2 expenses, from an expense perspective, it will probably be in the same level as Q1.

Okay, that’s helpful. Then on the gross margins, obviously you guys are getting 45% which is I think about 120 basis points below where you came in at in ’07. Can we think about how that should flow first half to second half? I would assume that you’re expecting more of a gross margin drop in the back half than the first half, right? – I assume you’re prudently planning for some close-outs in maybe the fourth quarter. Whether or not those actually happen or not, we’ll see, but I assume there’s some assumption of that at least, right?

Yeah, there are assumptions.

But in terms of first half/second half, does your guidance reflect more gross profit margin pressure in the back half than the first half?

Yes, that’s correct.

Okay, and then I don’t know if you really want to speak to hypotheticals, but if we were to assume that you guys have another great back half with Ugg in 2008 and there aren’t a lot of close-outs, how should we be thinking about it? The 120 basis point drop according to your guidance, is that mostly a reflection that you’re expecting some normal level of close-outs where if that weren’t to occur and you don’t have to close-out a lot of products, that there could be upside there? How should we be thinking about that guidance?

I would say that’s correct. As we indicated, our cost is fixed for the year, so any adjustment will be really based on the sell-through and the amount of markdown and write-offs.

Okay, and one last question on the international. I think it came in at about 14% of sales for 2007. I believe that your 3- to 5-year plan, there is an expectation of the international growth to be about 30% of the business, could you just give us a quick rundown as to where you are with your international distribution. What might be your few biggest markets there? What are some other key markets that you either haven’t developed very much or haven’t even gone into, and what’s on tap for that business over the next year or two in terms of developing and growing it as a percentage of the total business?

Well, first of all, we still have a long way to go in the UK. Even though that’s our primary driver in Europe, we’re just getting started in the UK. The brand is emerging as a year-round brand in the UK, and the spread and assortment product, you really haven’t seen that there yet, and that’s a very strong footwear market. Secondly, there are markets in Europe that are untapped for our brand, primarily Germany where we’re really just getting going, France where we really have no distribution, countries like the Czech Republic, Poland, Hungary - those are very strong markets potentially for the Ugg brand where we don’t have distribution, and outside of Europe, you have to look at markets like China and realize that that is a very strong market potential for the Ugg brand, and we’re taking steps to establish our premium luxury comfort positioning there. In those markets, particularly in China, brands emerge from a retail foundation, so it’s very important to establish the cache of your brand with a retail presence, and that’s how we’re doing it there. So, my opinion is that there are still some very large chunks of the population in Europe and the vast majority of the population in Asia that has yet to experience Ugg comfort and luxury, and we really are organizing our sales to exploit those opportunities.

And is there any data that you can mine from the internet that supports that there is a global business for the Ugg brand? I don’t know how much of your internet businesses is captured from outside the US.

We process all of our orders from the UK, for example, in our internet operation center, so we have a very good idea of demand in the UK, and we are long ways from meeting the demand – let me put it that way.

Alright, thanks good luck.

Thank you.

And again, if you would like to ask a question, please press *1 on your touchtone telephone. We’ll take our next question from Jeff Mintz with Wedbush Morgan.

Thanks very much, and I’ll add my congratulations as well.

Thank you Jeff.

I know marketing was kind of a big focus this year across the board. Can you talk a little bit about where that came in? I know the exact number will be in the K, but where that came in for 2007 and where you anticipate it to be in 2008 on a percent of sales basis, up or down?

Yeah, it’s about $17 million, if I remember. We don’t anticipate any deviation from that ratio of marketing to sales. I think that the key thing for us in 2008 specific to the Ugg brand, but also important for Simple and Teva is the retail presence, and the presentation of the brand and the telling of the story at retail. So, what you’ll see from us in 2008 with Ugg for example is not necessarily an increase in the number of pages that we’re running in publications, but you’ll see an enhanced retail presence across our entire distribution channel, and we’re doing that in partnership with our retailers, and we’re making those key investments as appropriate. You’ll see shop in shops, you’ll see enhanced presentations of year-round product, and you’ll see the same think for Simple and for Teva.

Okay, great. That’s helpful. Then just on the question of distribution – in the US, obviously you’ve talked before how there’s a lot of the country where you feel you’re under-penetrated in terms of getting into stores, now that we’re through fall of 2007, where do you feel you are in terms of distribution through the middle and the southeastern US?

Again, I think we still have long ways to go. We know from our conversation with retailers that they feel that the market for our products, especially if you roll in the spring line in those parts of the country and the way the line is evolving that there’s just a terrific opportunity for the brand. We have a fairly restrictive distribution philosophy because it’s my opinion that our products are premium in nature, and we want to assure quality in both presentation and in the production of the product we make. So, we’re very careful about rolling out our distribution beyond the existing model. That said, when we do want to expand into a region, we do so with very committed partners, and that’s really an important component of how we’re growing our brand. You won’t just see suddenly Ugg product available where you’ve not seen it before and limit it to one or two styles. You’ll see a full presentation of Ugg product—men’s, women’s, kids’; you will see year-around, spring, and fall; you’ll see boots; you’ll see slippers; you’ll see the whole package, and I think that that’s a very important component of our growth strategy in the US.

Okay, and then just finally on the Ugg business in Q1 which you didn’t guide it specifically, but can you give us some sense – I know you’re taking greater advantage of the opportunity to sell the boots post Christmas this year, so can you just give us some sense of where the growth is coming from for Ugg in Q1? Is it more weighted towards the boots, or… – I guess the real question is how do you see the spring orders doing on that product particularly?

Up until last year, I think it’s safe to say that we really didn’t know what kind of opportunity we’d have in Q1 with the Ugg brand because we never had the inventory. This year, we really decided that we’re going to develop our Q1 business in closer relationship to the demand that we feel is out there. So, our slipper business continues to evolve very nicely for Q1, our boot business continues to perform, and then of course we have the introduction of sandals and espadrilles—which which is a little early in the season yet, but all indications from the warm-climate markets are that those products are selling through and selling through quite well. So, if you remember a couple of years ago, we kind of disappeared at retail as soon as Q1 hit, and now you’re seeing enhanced spread and assortment of product in Q1, which does certainly bode well for our sell-through and our performance in Q1 and Q2.

Okay, great! Congratulations again and good luck

Thank you.

And our next question comes from Todd Slater with with Lazard Capital Markets. Please go ahead, sir.

Thank you very much. Kudos all around.

Thanks Todd.

Could you just go over a little bit - again the $4-million increment in SG&A in the first quarter, break it down a little bit for us in terms of the largest buckets, and is this number something that we should expect evenly across each of the four quarters or is it just the first…? I imagine it’s across the quarters, but how much will it be?

As we said Todd, for the full year, it was $8 million, and we said the fourth quarter was $3 million out of that, but the remainder $5 million is going to be, I would say, evenly throughout the next three quarters.

So $8 million for the year for ’08?

Correct.

It’s not 36 cents a share or something like that? That’s included/embedded in your, let’s call it, 06/07 guidance.

That was embedded in the guidance.

Okay, that’s great, and that’s Q1, human resources, and….

Yeah, it’s a component of all three items as I said – enhancing the management team, I mean the biggest piece was doubling the size of our distribution center and the implementation of the module—the depreciation expense of that.

Okay great, thanks. Then, what’s the way to think about your international opportunity globally in terms of your mix – as Mitch pointed it out, it’s about 14% of sales this year, and has your thinking changed on where that can get to, and talk a little bit if you could about the profitability profile of that business if it differs a little bit from here and if so how?

Well, first of all, I’m confident that our goal of 30% of our business coming from international is a realistic and achievable goal. We have spent the last couple of years building a foundation for growth internationally. We’ve been working with our distributors to establish a flow of product that’s appropriate to grow their business from. We have certainly the growth in the Ugg brand for them, which represents significant investment. They’ve been opening showrooms, they’ve been developing retail presence programs, they’ve been marketing the brand and using the images that we provide - so all those things are really a part of the foundation you need to then come in with a broader spread and assortment of product at retail. Just like in the United States, this brand began with, now what we call, our classic styles, and in other parts of the world, the brand is growing and beginning with those classic styles, but it’s much more rapidly accelerating to the full breadth in assortment of product now that we actually have that kind of product, and so I’m really excited about what’s happening on the international front, and I see us really doing some great things there. You asked about the profitability – on the international business, the overall impact from the bottom line should be positive. There will be higher expenses of course, but we’ll be getting the double margins. That should compensate for that, so anything that we’ll do, it will be accretive.

Okay. Thank you very much, and then lastly I just want to touch on the direct business if I may. Both the e-commerce and the retail pieces, numbers are off the charts growing faster than any other piece of your business. Has your thinking evolved at all in terms of the opportunity in vertical retail stores? Can you talk a little bit about how that piece is performing relative to your expectations and how many you think you can maybe operate around the world?

I think philosophically we operate our retail stores to enhance our wholesale business. I’m not at that place that says we’re going to supplant our wholesale business with our own retail business. I think retailers are quite expert at managing retail. They know what they’re doing, and the good ones do it exceptionally well. We feel that our brand needs to be positioned and exposed in a complete way, and it’s really a function of real estate – most stores just don’t have the room to showcase the product in the breadth and assortment that we have in mind. And part of it is also to test our concepts with consumers, and that is a very big component of the kind of retail that we’re doing. We learn a lot from the assortments that we put together, from the consumer feedback, and that allows us to do a much better job in refining the product mix for retailers – in a sense editing the line before we ever get to a wholesale presentation, and I think retailers in the end appreciate that and know the value of something like that.

Is it fair to say that the profitability metrics in your own stores are where you’d like them to be?

I don’t believe in opening stores that don’t make money – so, yeah I’m satisfied with that.

Great thank you.

Thanks.

And our final question comes from Howard Tubin with RBC Capital Markets. Please go ahead sir.

Hey guys, thank you. Just a couple of questions. Can you talk about inventory levels and where you think it’ll be at the end of the first quarter?

Well, the inventory level, we’ve not been providing guidance on that basis. What we’re doing and if you’ve seen it probably from where the inventory was—the level where it was at the end of Q4, it would bring the inventory early to accommodate our expected higher sales, and also it is a function of capacity from the factories and space in our warehouses.

And the other thing I’d like to add is, this year, I think we had a greater visibility into our top line than we’ve ever had. We’re feeling very confident in our strategy and in our plan, and I think that the nature of retail being what it is—in other words, a retailer will bring more of what sells in and less of what doesn’t—and the performance of the Ugg brand in 2007 bodes well for a retailer’s attitude about the brand in 2008, and they’ve made those commitments, so we have better visibility than we’ve really ever had, certainly since I’ve been here, and that’s allowing us to do a much better job of planning, so in that sense we have a high degree of confidence, so we’re really not worried about the inventory situation.

That’s great, and just one question on cash – you guys have almost $13 per share in cash now, so I guess two questions there; one, what’re you going to do with it all, and two, is there any auction rate security exposure in that cash or marketable security balance?

As I’ve said before, my attitude is that we are constantly on the look for the next brand that we can add to our portfolio – it’ll be lifestyle brand, it’ll be a brand that we feel has great potential that we can develop, given our unique approach I believe to building brands. That said, given the economy and the situation we face on a macro level, it’s not a bad time to have a fair amount of cash, so we are fairly comfortable that it gives us tremendous flexibility, and in that flexibility, when opportunity comes up, I think we’ll be in a good position to take advantage of it.

And Howard to your question about auction rate securities, less than 2% of our portfolio is in that instrument.

That’s great, okay great! Thanks.

Thank you. I want to thank you all for participating on the call and for your support this year. I know I speak for everyone in Deckers Outdoor Corporation when I say how much we value our investors and how committed we are to success, so thank you very much. We look forward to the next quarter.

This does conclude today’s conference. We thank you for your participation. You may now disconnect.