Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Deckers Brands' fourth quarter and fiscal 2017 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 difficulties hearing the conference call, please press star zero for operator assistance at any time. I would like to remind everyone that this conference call is being recorded. I'll now turn the call over to Mr. Steve Fasching, Vice President, Strategy and Investor Relations. Thank you, sir. You may now begin.
Thank you, and welcome everyone joining us today. On the call is Dave Powers, President and Chief Executive Officer, and Tom George, Chief Financial Officer. Before we begin, I would like to remind everyone of the company's safe harbor policy. Please note that certain statements made on this call are forward-looking statements within the meaning of the Federal Securities laws, which are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995.
All statements made on this call today, other than statements of historical fact, are forward-looking statements and include statements regarding our anticipated financial performance, including, but not limited to our projected revenue, margins, expenses, earnings per share, and operating profit improvement, as well as statements regarding our cost savings and restructuring plans, strategies for our product and brands, and our review of strategic alternatives. Forward-looking statements made on this call represent the company's current expectations and are based on currently available information. Forward-looking statements involve numerous risks and uncertainties that may cause actual results to differ materially from any results predicted, assumed, or implied by forward-looking statements. The company has explained some of these risks and uncertainties in its SEC filings, including in the Risk Factors section of its annual report on Form 10-K.
Except as required by law or the listing rules of the New York Stock Exchange, the company expressly disclaims any intent or obligation to update any forward-looking statements, whether to conform such statements to actual results or to changes in its expectations, or as a result of the availability of new information. With that, I'll now turn it over to Dave.
Good afternoon. Thank you, Steve, and welcome everyone. Today, we are going to spend the first part of the call reviewing our fourth quarter and full-year results. After that, we will shift our focus forward to how we are driving improvements in profitability. This will include specifics on the savings plan that we announced last call, as well as our financial outlook for fiscal year 2018. Before we discuss our results, I'd like to briefly comment on the process we announced at the end of April to review strategic alternatives. That process is ongoing. As you would expect, we are unable to comment until the board completes its review and approves a definitive course of action or otherwise concludes the process. With that, let me turn to our results.
During the fourth quarter, we executed on our strategic goals and achieved sales and earnings that were ahead of our expectations. For the quarter, our sales were above the range we provided due to better performance from UGG and HOKA, as well as better-than-forecasted DTC sales. Non-GAAP EPS, excluding restructuring costs and other charges, was $0.11. For the year, sales were $1.79 billion. Non-GAAP EPS was $3.82. For the quarter, we are pleased with the performance of the UGG brand and the reception to the UGG spring and summer lines. Sales of women's shoes and sandals grew over 20% compared to last year as we made continued progress diversifying and de-seasonalizing the UGG brand. As we indicated we would in our last earnings call, we reduced the amount of closed-out product sold into the domestic wholesale channel.
At the same time, we continued to drive growth at HOKA. Sales for the quarter were up 33%, pushing the brand over the key $100 million milestone for the year. HOKA's new product introductions, like the Arahi and Hupana, helped fuel healthy unit and margin growth. Looking ahead, we are excited about the domestic opportunity to expand distribution, as well as internationally, where we are just beginning to scratch the surface of the brand's potential. Our DTC comp was flat for the quarter. Once again, we experienced strong demand in our e-commerce channel, offset by declines in our retail store sales. For the year, our DTC comp increased 2.6%, driven by strong performance from our e-commerce channel, which benefited significantly from the launch of UGG Closet, as well as the close of our underperforming retail stores.
As we enter fiscal 2018, we are in a much stronger position compared with a year ago. The organizational review we completed has given us a clear path forward for improving profitability. Inventory levels are healthier at our retailers. We have transitioned the marketplace to better product and with more quality distribution. Nevertheless, we expect that the environment will continue to be difficult. With the sales headwinds facing the majority of the retail industry, we are focused on improving profitability through the four strategic priorities I laid out a year ago. As a reminder, they are developing compelling product, focusing on digital, optimizing distribution, and implementing cost savings. First, developing compelling product. Across our brand portfolio, our teams have elevated their offering. Consumers and the trade are responding positively.
HOKA is a perfect example, which won 18 awards in the last year, including Editor's Choice from Women's Health for the Hupana. With UGG, we've had success incorporating Treadlite and UGGpure further into the product line. One example is the Royale Slide, which was introduced this spring and quickly sold out. For this fall, we continue to innovate and are excited about the launch of our waterproof Classic with Vibram Arctic Grip and several high-profile product collaborations, including our announced collaboration with Phillip Lim. Second, focusing on digital reach to consumers. This past year, we had key wins with UGG Closet, which drove significant growth in our e-commerce business. With the launch of our UGG Rewards program, which now has nearly a half a million members.
We have great digital momentum, especially in the U.S., where we estimate over a third of our total UGG sales are done online, including ugg.com and online sales with our wholesale partners. Third, optimizing distribution. The goal here is to transform our account base to align with the changes in consumer shopping behavior. This year, we closed accounts that did not represent the best of the brand, and we opened new accounts with quality wholesale partners who are committed to showcasing more of our offering and also have strong online businesses. Finally, implementing a significant cost savings plan to streamline our organization and improve profitability. This has been a major focus over the last 12 months, and I'm excited to discuss that plan more in a moment. First, Tom is going to cover fourth quarter and fiscal 2017 financials.
Thanks, Dave, and good afternoon, everyone. Today, I will take you through our fourth quarter and full-year results and break out the restructuring and other charges recorded in the quarter. Please note throughout this discussion, where I refer to non-GAAP financial measures, I am referring to results before taking into account restructuring, impairment, and other charges that our management believes are not core to our ongoing operating results. Also note, our non-GAAP results are not adjusted for constant currency. A reconciliation between our reported GAAP results and the non-GAAP results can be found in our earnings release that is posted on our website under the Investors tab. Now to our results for the fourth quarter. Revenue was $369.5 million, which was ahead of our projections, primarily due to better performance from UGG and HOKA and better DTC sales.
Gross margin was 43%, compared to our non-GAAP result of 42.3% last year. The year-over-year difference was driven by less domestic promotional activity and continued supply chain improvements, partially offset by foreign exchange headwinds. Non-GAAP SG&A expense was $153.9 million, compared to $154.5 million last year. Non-GAAP earnings per share was $0.11 for the quarter versus $0.11 last year. In the fourth quarter, we recorded $35.9 million in restructuring and other charges related to retail closures, impairments, and organization changes. Of the $35.9 million, $9.9 million were non-cash charges. Now to the year. Revenue was $1.79 billion compared with $1.88 billion last year. The decrease was driven by a $106.8 million decrease in wholesale and distributor sales, partially offset by a $21.8 million increase in DTC sales. Gross margin was 46.7%, compared to our non-GAAP result of 45.4% last year.
The 130 basis point increase in gross margin was due to improved input cost and continued optimization of our supply chain, partially offset by foreign exchange headwinds. Non-GAAP SG&A was $669.6 million, compared to $656.2 million last year. Non-GAAP earnings per share was $3.82 compared to $4.50 last year. The year-over-year decline was driven by lower sales and higher SG&A, partially offset by 130 basis point increase in gross margin. The non-GAAP effective tax rate was 23% and better than expected for the year, but slightly higher than last year's non-GAAP rate of 22%. During the year, we incurred charges totaling $167.5 million, related primarily to restructuring impairments, of which $134.2 million were non-cash charges. At March 31, 2017, our backlog was up 6.6% compared to the same date last year. Directionally, UGG U.S. backlog was up low single digits, and UGG International was up double digits.
As a reminder, our March 31 backlog only includes orders from wholesalers and distributors for delivery in April through December. This backlog figure represents about a third of our total revenue and does not include our company DTC sales. All the fourth quarter or any future orders we may book, such as at-once orders or closeouts. I'd now like to hand the call back to Dave, who will provide an update on our savings plan and how we see it improving our business long term.
Thanks, Tom. As I said when I assumed the CEO role 12 months ago, fiscal 2017 would be a transitional period for the company. With the year now behind us, we are moving forward with a sound plan in place to improve profitability and lay the foundation for future growth. Last call, we announced $150 million cumulative savings plan before reinvestment that consisted of a combination of SG&A and cost of goods improvements. We said that these savings would be implemented over the course of the next two years, with the full benefit being realized in FY 2020. We also said that we'd provide more guidance on how the savings would flow through once we completed the year and finished our pre-book.
With that process now complete, we are pleased to share that the $150 million in announced cumulative savings will drive $100 million improvement in operating profit for the fiscal year 2020. With these savings, along with modest low single-digit revenue growth, we believe we can achieve an operating margin of 13% in fiscal year 2020. To provide some more perspective on where the savings will come from, COGS improvements will be achieved by reducing product development cycle, optimizing material yields, consolidating our factory base, and continuing to promote production outside of China. SG&A savings will come from further retail store consolidations, process improvement efficiencies, and reduced indirect spend. The process to implement savings is already underway. For FY 2018, we expect net SG&A to be approximately $10 million lower. However, this understates how quickly we are addressing our cost structure.
On a like-for-like basis, SG&A would be nearly $30 million lower, excluding the reinstatement of performance-based compensation. In regards to our global retail fleet, as we look out over the next two years, we are planning to reduce our global company-owned brick-and-mortar footprint by 30 to 40 stores, which includes both closures and the transfer of existing company stores to partners. By FY 2020, we are targeting to have an optimized company-owned fleet of approximately 125 stores globally. I will now turn the call over to Tom to provide guidance for the fiscal year 2018, as well as the first quarter.
Thanks, Dave. For fiscal year 2018, we expect revenue to be in the range of flat to down 2% compared to 2017 levels. Included in down 2% sales guidance are the following assumptions: slightly improved promotional environment with less closeout product in the channel, similar weather conditions to last year, DTC comp up low single digits, domestic wholesale sales down mid-single digits driven by U.S. wholesale account rationalization, international wholesale sales up mid-single digits, in-season reorders netting cancellations, and fewer retail stores, which represents lost revenue of approximately $15 million. The flat sales scenario assumes the following improvements: in-season reorders exceeding cancellations, slightly higher international wholesale business, and a colder start to the fall/winter selling season.
By brand, we expect UGG revenue to be in the range of -3% to -1%, HOKA to grow approximately 20%-25%, Teva up 1%-5%, Sanuk down -10% to -5%, and Koolaburra to be approximately $13 million-$16 million. With respect to gross margins, we expect full-year gross margin to be approximately 47.5%. SG&A as a percentage of sales is projected to be approximately 37%. For the full year, non-GAAP earnings per share is expected to be in the range of $3.95 to $4.15 on a share count of 32.7 million and an effective tax rate of 27%. As a reminder, this excludes any charges that may occur from additional store closures and other restructuring charges. Capital expenditures for the fiscal year are expected to be $45 million, and we expect to generate free cash flow of approximately $150 million.
For the first quarter, we expect revenue to be up low single digits compared with the same period a year ago. We expect a non-GAAP diluted loss per share of approximately -$1.70 to -$1.65 compared to a diluted loss per share of $1.80 last year. With respect to the 6.6% increase in our backlog in March 31 and how that ties to our full-year outlook for revenue to be flat to down, there are a few factors to keep in mind. First, backlog is simply recorded at a point in time and can't be compared with accuracy from year-to-year. For example, this year the main driver of our backlog growth was due to changes we have made with our EMEA wholesale partners in the way that they pre-book. Traditionally, our EMEA wholesale partners have booked later than the U.S.
This year, we really pushed them to place orders earlier so that we can better manage our inventory and get commitments up front. Second, between reorders in December and our fourth quarter business, there is still a meaningful amount of wholesale sales that we currently don't have orders for. While inventory in the channel is cleaner than it was a year ago, based on how the past two holiday seasons have played out, combined with the ongoing traffic challenges across brick-and-mortar retail, we believe that it's prudent to be conservative when it comes to our assumptions until we have more visibility into the consumer demand. Third, our full-year forecast obviously includes our direct-to-consumer business, which is not captured in backlog and represented roughly 35% of our fiscal year 2017 sales.
As I said, it is important to remember that we are facing a headwind in fiscal year 2018 from the stores we closed in fiscal 2017, which in total account for approximately $15 million. I will now hand the call back to Dave for his final remarks.
Thanks, Tom. We are confident in our ability to execute our plan to improve profitability. We have made significant progress in the last year, and I want to thank our employees for their hard work, tireless dedication, and willingness to embrace change to get us to this point. I look forward to continuing to successfully execute our strategy as we drive towards a 13% operating margin. As a reminder, we will not be commenting on our strategic alternatives process. I ask that you limit your questions to our financial results announced today. Thank you in advance for your cooperation. With that, we'll open up the call for questions. Operator?
Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Also, in the interest of time, we do ask that you limit yourself to one question and one follow-up, and then re-queue up for any additional questions. The first question is from Jonathan Komp of Robert W. Baird. Please go ahead.
Yeah. Hi, thank you. A couple of questions on the longer-term outlook. First, maybe just asking on the 2020 view of reaching $2 billion of sales with next year projected flat to down slightly, obviously implies a better growth the following two years. I just wanted to maybe parse out what you're seeing in terms of initiatives to help restart the top-line growth rate after this coming year.
Yeah, sure. This is Dave. What I would say, the focus for us around driving growth and getting to that $2 billion mark is really around the HOKA and UGG brands. For UGG, we're really focused on driving growth through the men's business, spring and summer businesses in women's. Really from a channel perspective, it's e-commerce globally. Europe is driven by our opportunity that exists still in Germany, and then in China. In addition to that, in the HOKA brand, we see significant opportunity for growth in that brand just after passing the $100 million mark. We're going to reallocate some resources to drive growth in that brand, investing in marketing to drive awareness and investing in capabilities in our international markets to activate the opportunity there as well.
Okay. I think it's implied kind of a mid-single-digit top-line growth after this year. Sounds like the cost-saving side is really developing and materializing pretty quickly, any thoughts on how quickly the revenue could get to those levels?
Yeah, well, I think we're conservative at this point based off the challenges in the marketplace that we see in the short term. We're applying that definitely for FY 2018 and still into FY 2019 and FY 2020. We're focused on driving growth higher than that, at this point, from the outlook for today, against some of the headwinds of store closures, we think that's the right number.
Okay, great. Maybe one more just on the longer-term targets. The difference in the gross versus the net margin improvement. Could you just maybe walk through kind of what the difference is there, what you're investing in, or what the offsets versus the gross savings might be?
Yeah. We still see gross margin expansion with all the supply chain initiatives we've been talking about and the movements in the factory, as well as the other initiatives we've talked about. We see a lot of leverage on the SG&A line. We feel really good where we stand from a cost savings initiative on the SG&A side. In fact, we've got enough levers in place and enough visibility on the operating expense side, including, we're talking about further reduction in our retail store fleet. When you consider all that together, we feel even if we get flat revenue growth through 2020, we've got enough levers in place that we can still drive $100 million of operating profit improvement and an operating margin at least 13%.
Okay.
The next question is from Camilo Lyon of Canaccord Genuity. Please go ahead.
Thanks. Good afternoon, guys. Wait, Tom, on just your last comment there. The $100 million in the profitability improvement and the 13% EBITDA margin you're expecting is assuming a flat sales growth number? A flat number?
The long-term-
increase?
The long-term targets we talked about, we feel we've got the right opportunities in place to grow the top line as well, and we'll have to do some reinvesting to do that, and we'll generate $100 million of operating profit and a greater 13% operating margin. What I wanted to reinforce was the fact that we have enough SG&A savings levers in place that if we're not getting traction in the marketplace, we'll slow down the reinvestment, and we'll still get $100 million of operating profit improvement and still at least a 13% operating margin.
Yeah. Camilo, just to be clear on that. Dave talked about 2020 with low single-digit growth revenue targets. That's what we're talking about, the $2 billion.
To Tom's point, we can still achieve the targeted 13%, even if we don't get that low single-digit revenue growth. That there's enough variability in the expenses that we can cut back to still achieve that 13% operating profit target.
Correct.
Got it. Understood. Thanks for that clarity. I did want to ask on the cadence of the expense savings, it sounds like you're going to see about $10 million this year. How do we think about that incremental expense savings realization in fiscal 2019 as you get to 2020?
Yeah. As you think about the $100 million profit improvement, basically one of the headwinds, as Dave mentioned, that we're facing in 2018 is an assumption of a performance-based compensation payout. That's netting some of that down in 2018. Once you get to 2019, the way we have it modeled in, roughly, is you get a more like for like. The savings or profit improvement that you'll see will be greater because you won't now have that headwind of the performance-based compensation. Similar types of improvements for 2019 and then into 2020. That's what gets you your $100 million.
Got it. Great. Then my final question. Dave, if you could just give some thoughts on how you think about or how you have thought about your wholesale rationalization domestically. I say that in the context of this past season, in which there was a lot of, some of your, not a lot, but there were a few wholesale partners in which they pulled the promotional trigger sooner than they should and disrupted the pricing in the market. How did you address that, and what should that look like as we get into fall?
Yeah, good question. We've made pretty significant progress on transforming the North American marketplace, that's a combination of a few things. One is cleaning up the number of accounts that we have in the North America business. We've talked about that over time. We've closed quite a few accounts, roughly about 400 accounts in the UGG brand, some of those sizable. We have addressed some of the challenges that we had last year with MAP violations and discounting. As you know, we incubated some new opportunities last fall as well with Macy's, then also Amazon. We've cleaned up some of the smaller disruptive accounts.
We've strengthened the relationship with our top key accounts. We've opened new accounts that we think represent the brand in a positive way and also allow us to do more e-commerce business across the board in those channels. Still work to go. We feel very confident in the progress we've made and the repositioning of the brand. The other thing to keep in mind is we will be going into this quarter, the fall quarter, in a better place from an inventory perspective. Less closeout inventory in the channel and the headwind of the Classic I hangover is behind us.
Just on that final point, do you expect more account closures or where you stand now is where you're comfortable at? Did the onboarding of Macy's in a bigger way and Amazon, was that a direct offset to the accounts that you closed, or did you come out at a deficit or surplus?
We will continue to evaluate the fleet. We have new management in place in North America sales, and a strategic account focus there. Over time, we will be closing more smaller accounts. I think that's the right thing to do for the brand and just how we control the marketplace and presentation of the brand. Overall, we will be slightly down. While we are opening new accounts, offsetting some of those closures and some of the conservative nature of our key accounts nets us in a situation that's slightly down for North America wholesale.
Got it. All the best. Thanks, guys.
Thank you.
Thanks.
Thank you. The next question is from Omar Saad of Evercore. Please go ahead.
Hi. Thanks. Good afternoon. Appreciate all the information. I wanted to see if we could dive in a little bit deeper on the solid performance out of UGG in the quarter. Maybe get a better understanding if it was driven by new styles, channels, the weather. Any insight there would be helpful, I think, because we try to understand the evolution of that brand and how it's
For the fourth quarter? Yeah. What we're seeing in UGG
Yeah.
Okay. As you know, we've been focused on diversifying the UGG brand and building our spring and summer business for quite some time. We actually have had a pretty successful quarter in two categories, sneakers and in sandals. We had a few sneakers that were performing very strong for us, sold through at a high rate and drove the increase of 20%. Sandals across the board, but the introduction of the Royale Slide into our DTC channel was a best-seller as well. Starting to get traction in these new categories, and I think it's driven by the fact that it's distinct ownable product that has the DNA of the brand and has uniqueness in the marketplace. Also having more belief from our partners of showcasing that product in the timeframe as well.
I don't know if, Tom, you want to add anything on the total.
I was going to say, our UGG business internationally was stronger than expected. Our direct-to-consumer business was stronger than expected, really led by our domestic e-commerce business. Did very well. There's one, this is not UGG, but the HOKA business was above expectation for the quarter.
Fantastic, guys. Thanks for the help.
You bet.
Thank you. The next question is from Scott Krasik of Buckingham Research. Please go ahead.
Yeah. Hey, everyone. Congrats. I have a bunch of questions. I'll try to make them fast. For the year, what were Classics as a percentage of total UGG sales, and then what were specialty Classics as a percentage of total UGG sales?
In terms of women's, they ended up still about 25% of the women's-
Core Classics.
Core Classics are 25%, specialty Classics still ended up about 25% of the
Yeah
the women's business.
Okay.
Consistent with what we were.
Yeah. We think that's a good steady rate going forward.
Right.
Balanced out that business. Core Classics at 25% we think is the healthy rate going forward.
No, that's good. Just as you look at the backlog as of right now, is that sort of how the backlog is booked as well? Are there any outliers within the backlog?
No, pretty consistent. Yeah, I think the cleanup, both from a Classics perspective in the marketplace and account rationalization, the focus on innovation in styles like the waterproof Classic, the weather product, and some of the specialty Classics, have really netted us out in a very similar shape for the fall, which I think is the right thing to do.
Good. Okay. Then what's your DTC comp assumed for the full year, and is there any quarter where you expect it to be an outlier?
We expect the DTC comp to be up low single digits.
Okay.
For the quarter.
Yeah. Quarter for Q1 we said.
For Q1, up low single digits.
Yeah.
Right.
Yeah.
Yeah.
Which is equivalent to what we delivered for the year. Our full year DTC comps were low single digit positive.
Okay. No, that's helpful. Then just sort of when you look at the 2020 plan, what percentage of your UGG sales do you expect to come from wholesale, and what percentage do you expect to come from DTC?
Yeah, we haven't given that level of visibility yet. DTC will be driven by growth in e-commerce, and we're really heavily investing in continuing to bolster that business globally. We'll have some store offsets against that. E-commerce will be a driver. On an international level, it'll be driven, as I said, from really Germany and the Europe market and then upside in China. We haven't given out the mix yet of full wholesale.
More DTC.
Yeah, definitely a little more DTC.
It will be held back a little bit as we reduce our store count.
Yes.
Right. Yeah.
Yeah. Okay.
E-commerce.
Oh, sorry.
I was just going to say e-commerce is growing faster.
Right.
Okay, thanks. Just lastly, you guys should generate a ton of cash based on this plan. I'm just wondering how and when you elect to deploy the cash, and thank you very much.
Good question. That is part of the board's current strategic evaluation, so we really can't comment on that right now.
Okay, thanks, guys.
All right. Thank you.
Thank you. The next question is from Randal Konik of Jefferies. Please go ahead.
Yeah, thanks a lot. Dave, I just want to follow up on the wholesale rationalization. You gave us perspective on, I think you said closed 400 accounts. Is there any more granularity you can give us on how many more? Because you said there's more to come. Just any more granularity on how much more will come? Then is it safe to assume, given where the backlog trends are and given the account closures that have occurred already, it almost seems as if you've reached finally a nice or at least an inflection stabilization in the core account base. Is that fair, or is that on the way? How do I think about that? That's my first question. Thanks.
Yeah, I'll answer your second one first. I think that we have landed on a nice stabilization of core accounts that are driving the majority of the volume. We use the term we want to win with the champions, the channel champions, and we think that with our current key accounts and some of the new ones we've incubated, we believe these are the players that are going to be around for a while. They have strong e-commerce businesses that we can continue to develop, and they're going to represent the brand in a positive way. That includes some of the newer accounts we're incubating, such as Footaction and SIX:02 in North America. Beyond that, we'll continue to look at cleaning up the distribution. We want to elevate the presence of our brand year-round. We want to showcase the full breadth of the brand.
We don't need more distribution for core Classics. We have that covered, and the customer knows where to find that. I think you'll see another couple hundred, few hundred over the next few years of account cleanup in North America, but we haven't given the real detail or mapped that out exactly yet.
Got it. Can I ask about the international? Obviously, it seems like a big opportunity there's been, just I guess some fits and starts there. Can you give some perspective on how you think about potential sizing of the international opportunity? What things you need to take on to get that geographic part of the market to accelerate? Beyond, I think you said Germany and the U.K., I think China you said, what other areas are interesting, and what areas are just not appealing and why?
Yeah. We've been working hard over the last year, couple years, but really in the last year, to kind of reset the game plan for Europe and also in China. We have new leadership in our European business for the UGG brand that came on in the last 6 months. We have spent a lot of time cultivating the new markets there of Germany, and looking for new opportunities beyond existing accounts and beyond Classic business. I feel like we're in a pretty good place in Europe. The brand continues to be strong. The order book looks good for the fall season, and I think that people are realizing there's more opportunity for the UGG brand. Good leadership in place, good account segmentation strategy in place, product is right for the market, and also the strategic partnerships with the key people over there are in place.
I think we're in a good position for Europe. On the Asia Pacific side, the game is really all about China. We have obviously proved success with the brand with our owned store model and e-commerce model. The partner program is off to a strong start. We realized that through the conversations with our partner, and the opportunity in the brand in that market, there's bigger upside for growth over time. We're going to invest in the brand in that market. We've shifted some marketing dollars for this year heading into fall 2017. We are in the process of aligning with a key celebrity in that market to really drive brand heat and brand awareness. With the continued partnership with our wholesale partners opening doors for the UGG brand, we see that as a significant opportunity.
Can I just ask one last one here. On the good work you're doing around cleaning up the distribution on the U.S. market, that's going to create more UGG, I guess, scarcity value, and then give you more ability to kind of police pricing, et cetera. How should we be thinking about kind of AUR trend and pricing architecture in the UGG-based business or the UGG business over the next couple of years? Because it seems like there's an opportunity to kind of get more firmer pricing, less markdowns, less closeouts on a more, not just on a seasonal basis, but on a more sustainable structural basis that should give this business model more kind of long-term, higher structural margins. I just want to get your thoughts on that, and then I'm done. Thanks.
Yeah, I think you're thinking about it the right way. We are invested in the long-term health of the UGG brand. We think a little bit of scarcity across some of the core Classics business over time is the right thing to do. We're focused on improving ASPs and a tighter control on inventory in the marketplace. You'll see this fall that we're going to have less closeouts in the market. That's the plan. More full-price business and tighter control of the inventory through the process. You've really summed up the goal long term.
Great. Thank you.
Thank you.
Thank you. The next question is from Jim Duffy of Stifel. Please go ahead.
Thanks. Hi, guys. Couple questions from me. First, thanks for the detail identifying the components of the savings opportunity in both the cost of goods and SG&A buckets. Tom, which of those do you expect come earlier in the window, and which do you see materializing later in that window through fiscal 2020?
I mean, they'll both start coming not only in 2018 but 2019 and 2020. They'll occur in all three years. We see the SG&A opportunity is very large and significant, not only this year, but also in 2019 and 2020.
I think, Jim, we're starting to see the impacts already of the COGS savings. The SG&A savings will be heavily driven by retail store closures over the next two years. It's just a matter of timing and when we can get those stores closed.
As well as the other indirect spend savings we see and the other organization process improvement efficiencies we see.
Okay. In terms of the evaluation of the retail fleet, is it just a matter of an NPV calculation or IRR calculation about getting out of those leases?
Well, the assessment really comes down to A, is it a strategic location, does it serve the brand long term? You couple that with the financial performance, current financial performance, based on outlook for that location, what kind of returns are we getting on there. We have our threshold of 20% returns on profit for 4-wall. When you look at that over time, we think that we need to have a more balanced fleet between full price and outlet stores globally. Full price to serve the consumer and the brand diversification efforts, and then the outlet stores in the market to make sure we keep a clean marketplace and drive profit.
Okay, great. I know implementation of product segmentation strategies go hand in hand with your agenda to be more strategic on distribution. In this fiscal year, will we see evidence in the marketplace of those product segmentation strategies? Is that delayed into the next fiscal year?
Yeah, no, good question because that's really important for the brand long term. You're going to see initial results of segmentation. The challenge with that is we are retrofitting, so to speak, the product line for fall 2017. When you get to spring 2018 and really fall 2018, you will see a much more robust segmentation strategy with product designed specifically for channel and tier.
Okay. Thank you, guys.
You bet. Thank you.
Thank you. The next question is from Jay Sole of Morgan Stanley. Please go ahead.
Hi, this is Joseph Wyatt on for Jay. Just a few questions here. Can you talk about the sort of the cadence of store closures we might see over the course of the year? Secondly, on the cost buckets between gross margin and SG&A, is it possible you sort of rank the importance of each of the elements that you listed? Thanks.
In terms of the cadence, we're still evaluating that. What typically goes into play is, if you can't get them done sooner in the year, then you go ahead and take advantage of peak and get a big return on the store, and you typically have them closed by the end of the fiscal year. In terms of what may be closed this year versus next year, to be determined. It is going to be a function of, in some cases, what kind of cash payment we need to make to get out of the store. For this year, for fiscal year-end 2018, the assumption we're making is that they're going to be closed towards the end of the year. Therefore, there's really not a big impact on revenues for the year.
Great. Including transfers to our partners in China.
Right.
All right. Thanks. You have a second question?
Could you rank the importance of the buckets of COGS saving?
As far as the components driving the cost savings?
Yeah.
I'd say the biggest thing there is consolidating the factory base, moving production outside of China, the material yields, some of the other sourcing negotiations and things that we're doing.
Yeah. Ongoing over time, the go-to-market process and development process. SKU rationalization, SKU optimization, just improving our product development and cycle times. We'll have a payback on that, too.
All right. Thanks so much.
Thank you.
Thank you. The next question is from Rafe Jadrosich of Bank of America Merrill Lynch. Please go ahead.
Hi. Good afternoon. Thanks for taking my questions. Just in terms of the $50 million of reinvestment, where will that be focused?
Yeah. There's a few areas. First and foremost, the reinvestment will be focused on our growth drivers. In the UGG brand, again, around the areas of men's in spring and summer, and then creating awareness in the HOKA brand. That's a marketing reinvestment in the HOKA brand. In addition to that, as Steve mentioned, putting back the performance comp, performance-based comp into the mix. You have a level of sales-related variable expenses to the growth over time as well. Those three buckets.
Thank you. I might have missed this. How many stores did you finish the year with?
160?
160. We said by 2020, we think 125 globally owned stores is the right number for the size of the business and our ability to showcase the brand.
All right. Great. Thank you.
Thank you.
Thank you. The next question is from Bob Drbul of Guggenheim. Please go ahead.
Hey, good afternoon. I guess the first question is, on the backlog numbers that you talked about, does that include the account closures that you had, or did you exclude it year-over-year?
It's total.
That's total. It includes the account closures that we've had.
Right.
Correct.
Then can you talk a little bit on an update on the men's business, how it's performing, the outlook, as well as what you've learned with the Koolaburra with Kohl's?
Yeah. Men's, we're really excited about the momentum we have in men's. We started off last fall with continued momentum in our Neumel style. That outlook for that product going into fall 2017 is very strong. In fact, the Neumel has become the number one style in the men's business, which is a first for us. It's usually a slipper. It's indicative of the fact that we're getting a new customer into the brand, a younger consumer in the brand, and diversified distribution for the men's products. We're very excited about the progress in men's across the board, but particularly in that Neumel franchise that we think we can continue to leverage. Koolaburra, again, a small business, but started off well this past year with our introduction and launch primarily at Kohl's.
We're going to continue that business to grow in a handful of accounts. We're not looking to sell this at a broad distribution to independents. It's really around a key account focus and with a lean team. We think this year we can double the business from last year and continue to incubate that business over time.
If I could just follow up on the 400 accounts. Is there a dollar number of sales that was attributed to those accounts? How much did that influence the backlog that isn't in your backlog this year that you guys did do business with last year?
Yeah. Generally speaking, large number of doors, small amount of business, except for maybe a handful of little bit more sizable ones.
Right. Okay, great. Thank you very much.
Great. Thank you.
Thank you. The next question is from Corinna van der Ghinst of Citi. Please go ahead.
Thank you. Hi, good afternoon. Just some quick follow-up questions from me. On the reinvestment that you guys are planning, is that incorporating any additional marketing expense, or can you talk a little bit about what you guys are focusing the marketing on and also the % of sales versus last year, maybe?
Yeah. The % of sales over time, we see it roughly about the same, maybe a little bit of an increase.
Right.
What we've done over the last year through all this restructuring work is we've scrubbed the marketing spend globally. We're reallocating to three main areas. One is digital globally across all brands. One is in UGG, particularly in the areas of spring and summer in men's and China. Incremental spend is focused on there, reallocated there. Really on driving awareness in the HOKA brand. From a % increase over last year by brand, HOKA is going to have the most significant increase in marketing spend to drive awareness, so we can start to see more success in the run specialty channel and beyond. Also in Europe, where we have a pretty strong business that needs more awareness help in the country of Germany and the U.K., and then incubating China as well. Obviously that brand has momentum.
When the customer hears about it and when they try it, they're hooked. We just need to focus on growing awareness to optimize the size of that brand.
Okay, that's helpful. Then just to follow up on Macy's, I think you guys had said you were expanding to around 100 doors. Is that number going up more than you guys had previously planned? Can you talk a little bit about the expansion that you guys are doing there? Are you going to do more shop in shops than you've done in the first season? Just kind of what those square footage expansions will look like.
Yeah. We started last fall with the initial launch in Macy's Herald Square, which was very successful. In fact, they gave us more space for the months of November and December. We also did a 35 store test with a broad demographic of store locations. We've now parlayed that into continuing to support the Herald Square and shop in shops that we established. Then we're going to 200 doors. I believe we started that for spring, that will continue into fall. Right now we're comfortable with that amount. We want to optimize the business in those stores and make sure we have a robust presentation across all genders and all seasons. That's going well so far, so we're optimistic about the opportunity going forward into this fall, both in stores and online.
Okay, great. Then just one final follow-up on just your inventory management plans going forward. You guys did an event at DSW last fall, you've utilized the UGG Closet function a bit more. Can you talk about how that strategy is being planned for this fall versus last year, how you're kind of thinking about that longer term as well?
Yeah. A couple things. One is, we spoke on the last call about selling less closeouts into the channel this past Q4. We achieved that goal in North America. There's less closeouts in the channel to begin with. We did utilize UGG Closet to help flush some of that inventory, which from my perspective, is a very healthy way to do it because you are getting higher margin per style. You're getting the customer data as you make that sale, you are selling the inventory directly to the consumer versus to an account who may hold onto that and then sell it later in fall, which will disrupt your full price business. That's going to continue going forward. We'll utilize UGG Closet for that as a way to optimize the margin of excess inventory.
Generally speaking, we are focused on having fewer closeouts across the board over time. Then we will continue to utilize key accounts for some of the closeout business such as DSW and Nordstrom Rack, et cetera.
Great. Thank you.
Thank you.
Thank you. Our final question comes from Erinn Murphy of Piper Jaffray. Please go ahead.
This is Eric on for Erinn. Thanks for taking our questions. First one, I guess for me is, as you are closing the closed stores, how are you thinking about balancing the recapture between your own e-commerce website of those units and 3P replenishment type websites, Amazon, Zalando, et cetera, as those units shift, especially on the 50% of the business that's classics and specialty classics?
Yeah. It's hard to capture 100% of that business, obviously. We're planning on capturing a small percentage of that business from the store volume. The other challenge that we have to face when we do close those stores is those stores are driving business to our online channel through our Infinite UGG program and click and collect. We're not going to capture 100% of those store closure business. That's why we estimated the $15 million headwind this year. You will see a little bit of pickup, but it's certainly not to the rate where you can capture that business going forward.
Thanks, guys.
Thank you. I would now turn the conference back over to Mr. Powers for his closing remarks.
Well, thanks, everybody. With the fiscal year 2017 now closed and fiscal year 2018 beginning, I would like to reiterate our focus on improving profitability and strengthening our brands for future growth. As we look forward, the entire company is intensely focused on achieving our 13% operating margin target for 2020. We'll do this by driving growth in our UGG and HOKA brands, optimizing profitability in our Teva and Sanuk brands, and executing on the cost savings and gross margin improvements over the immediate term. While the marketplace may continue to have its challenges, we're confident in our ability to control our cost structure in line with the changes in our business patterns while continuing to optimize our sales channels globally. In closing, I would like to thank all of our stakeholders for their support and employees for their continued focus and passion for the business. Thank you.
Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time, and thank you for your participation.