Earnings Call: Q2 2015

Oct 23, 2014

I would now like to remind everyone that this conference call is being recorded. I will now turn the call over to Linda Payson, Vice President of Investor Relations and Corporate Communications. Welcome everyone joining us today. 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 are forward looking statements within the meaning of the federal security 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. All statements other than statements of historical fact are forward looking statements. These forward looking statements include statements related to the company's anticipated financial performance, including its projected revenues, expenses, gross margin, operating margin, capital expenditures, earnings per share and effective tax rate. These statements may also relate to the company's brand strategies, store expansion plans, inventory management systems and customer retention policies, 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. The company's business is subject to a number of risks and uncertainties, some of which may be beyond its control and actual results may differ materially from the results expected at the current time. The company has explained some of these risks and uncertainties in its earnings press release and in its SEC filings, including the Risk Factors section of its Annual Report on Form 10 ks 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 disclaims any intent or obligation to update any forward looking statements after the date hereof to conform such statements to actual results or to changes in our opinions or expectations, expect as required by applicable law or the rules of the New York Stock Exchange. As a reminder, we have posted supplemental information about the 2015 Q2 in a document entitled 2nd Fiscal Quarter 2015 Commentary. This document is on our corporate website at www.deckers.com. You can access this document by clicking on the Investor Information tab and then scrolling down to the Featured Reports heading. We believe the approach of providing this additional background information to you will make it easier for you to digest the financial information from the quarter and free up more time on the call for explanations of our performance and outlook, discussions of our strategic initiatives and Q and A. With that, I'll now turn it over to President, Chief Executive Officer and Chair of the Board of Directors, Angel Martinez. Well, thanks, Linda, and hello, everyone. Tom George, Chief Financial Officer Dave Powers, President, Omnichannel and Zohar Ziv, Chief Operating Officer are also on the call. We delivered a very solid quarter with revenues and earnings up over 20% compared to the same period a year ago. Anchored by our company wide consumer centric focus, we believe our evolving omnichannel strategy and compelling product offering has allowed us to drive increased conversions across our retail and e commerce channels. We believe that our current momentum has the company well positioned as we head into our biggest most important selling season. Our Q2, the quarter ending September 30, is a transitional period for our business. The UGG, Teva and Sanuk brand summer collections wrapped up a solid selling season as consumers responded favorably to our improved offering of sandals and casual shoes. At the same time, HOKA continued to grow at a rapid pace driven by increased distribution of the brand's innovative running shoes that are now reaching a broader consumer audience. We started shipping our fall collections for our global wholesale accounts in the 2nd fiscal quarter and began resetting the presentations in our direct to consumer channel to reflect the change in seasons. This fall, we focused the UGG brand on providing consumers with a more compelling offering of casual fall boots and shoes featuring a sharper opening price point. Our strategy had a positive impact on our sell in, which was the primary driver of our 2nd fiscal quarter growth. Sell in for the fiscal quarter was ahead of our projections as some international and domestic wholesale customers requested earlier deliveries into this quarter. In terms of sell through, it has been a good start to the fall with consumer demand for our collections up nicely over last year and in line with our expectations. Starting with the UGG brand, transitional sneakers, casuals and slippers sold well early in the Q2 and this was followed by casual boots as consumers responded positively to the styling and stronger price value relationship we introduced this year. With temperatures turning cold in recent weeks, sell through of weather boots and classics have gained pace across the majority of our markets. As we move deeper into the fall season, our classics including specialty classics, slippers, fashion and cold weather boots, historically our best selling collections, will become a better percentage rather bigger percentage of our merchandise offering and the focus of our marketing efforts. We're also having success outside of women's. Men's casual shoes and boots have consistently sold well since our This is UGG campaign with Tom Brady kicked off at the start of the NFL season. At the same time, early reads on UGG Home and Loungewear, 2 small but burgeoning categories for the brand, have been very strong. Both of these categories will have strong presentation this fall and holiday in our DTC channel as well as in many of our important wholesale customers including Nordstrom, Dillard's and Neiman Marcus. So overall, we're clearly seeing the benefits of our expanded UGG product line as we build on the strength of the UGG brand to increase exposure to new audiences and improve our performance across all seasons. Teva's performance continues to benefit from the work we've done positioning the brand's original sports sandal with promotional platforms and events that are culturally relevant to today's market and the audience we want to reach. Our integrated digital PR, social and sponsorship campaign has generated over 500,000,000 impressions year to date, significantly broadening Teva's consumer reach. The Originals collection has been a halo for the brand's entire product line, helping drive sales of flip flops, casual shoes and boots and hiking boots during the Q2. To build on current momentum and extend the brand selling season, this month we launched an innovative collaboration campaign with Woolrich titled Socks and Sandals. The collaboration pairs Woolrich or wool blend socks from Woolrich to complete the patterned webbing and colorways of the original Universal sandal and is exclusively being sold at urbanoutfitters, teva.com and woolrich.com. In addition, we are pulling forward a select 2015 introductions in time for the start of the gift giving season to further support selling, especially in warmer weather locations. Looking ahead to next year, we're refreshing our originals line with new colors and new materials, while at the same time leveraging the Originals DNA to launch a new collection of lifestyle footwear featuring canvas casuals and boots for men and women. Turning to Sanuk. Sales of women's sandals, especially from the brand's popular yoga mat collection, performed very well during the quarter. On the men's side, new styles of the brand's iconic sidewalk surfer as well as new canvas casuals helped drive sales. The plan is to build early momentum for spring 15 over the next two quarters by emphasizing new product introductions in stores and on our website, including women's yoga ballet flats, our women's cat collection of casual contemporary shoes and men's casual with a focus on the stylish boulevard collection. We believe that we have a great long term potential for Sanuk with the casual footwear market and believe that we can leverage the brand's authentic surf heritage into more mainstream opportunities. Turning to HOKA. The 2nd fiscal quarter was highlighted by the introduction of the award winning Clifton, which had a very positive impact on the brand's performance and market perception. With a more commercial aesthetic, the Clifton has broadened HOKA's consumer appeal and helped bolster his position as a serious player in the highly competitive world of performance running. The Clifton won Editor's Choice Awards from both Runner's World and Competitive Magazine, which has validated HOKA for many runners. The recognition and broad appeal of the Clifton has come at an important time for the brand as we prepare to expand distribution of HOKA beyond running specialty doors and international sporting goods chains early next year. We expect to add distribution at the Sports Authority, Finish Line and Hibbett Sports starting in January of 2015. These sporting goods chains combined with Sports Chalet and others will put us in 100 sporting goods stores by spring of 2015. And in addition, we're launching a trail running shoe exclusively for REI called the Challenger ATR, which will be featured this holiday season in all 136 REI doors. So overall, we're very pleased with how the brand is progressing at this stage, and we're excited about the broader distribution opportunities that lie ahead. In support of our strong product collections this holiday season, we've invested in our most comprehensive marketing plan to date. This is UGG, the brand's 1st global brand marketing campaign, which launched in mid August, will anchor our consumers' outreach strategies across all media, including print, digital, social, in store and out of home. Continuing with the theme of connecting with consumers on a more emotional level by showing how the brand fits into consumers' lives, we created 4 extensions of This is UGG for the holidays. This is magic, this is joy, this is warmth and this is cheer. Each showcases a different key holiday classic or slipper style against the backdrop of a creatively executed snowflake. This campaign will feature both women's and men's styles and will have a focus on gift giving. We're also incorporating a new classics campaign aimed at generating top of mind awareness of our classic products, reminding consumers of the love for our heritage iconic boots and their special place in their lives. Our holiday media plan launches on November 17 and runs until December 28. For this period, we're taking the wins from a successful holiday campaign last year and expanding our relationship with our top performing partners to create targeted advertisements that spike at key times during the season. We'll also be very active on social media with content that ties to seasonal events such as the arrival of cold wet weather, holiday travel and of course gift giving as the UGG brand is one of the most sought after holiday gifts in the world. I should note that our new weather related creative on the UGG site and merchandising focus is also helping drive conversion and sales in our women's boots category. We're seeing that there's a very attractive opportunity for the UGG brand to grow in the rainy weather category, and we intend to put more focus on this area in the Q4. We're really excited about what we plan from a product and marketing standpoint for the holidays, and we believe that our combined efforts will drive consumers to our global omnichannel network of retail stores, e commerce websites and wholesale partners. Now let me turn the call over to Dave, who will discuss our direct to consumer business and our international wholesale and distributor businesses in more detail. Dave? Thanks, Angel. Our direct to consumer business posted a solid gain with 2nd fiscal quarter total sales increasing approximately 26% over the same period last year and DTC comparable sales, which includes combined worldwide retail same store sales and worldwide e commerce sales, increasing approximately 3% compared to the same period last year. Store traffic was challenging this quarter, particularly in areas that experienced above average temperatures during September, such as the Western U. S. And Europe. We were able to partially offset this headwind by improving conversion by double digits versus a year ago, which we believe underscores the effectiveness of our recent efforts to elevate the in store experience and expand the breadth of our product offering. We remain focused on evolving our DTC model to quickly adapt to changing consumer shopping behaviors and preferences. As we continue to innovate, we believe the net effect will be consistent growth of our overall DTC business and a positive impact on the company's profitability. We are continuing to see the benefits stores have on e commerce sales in markets where we have opened new stores, affirming our omnichannel approach to creating a seamless shopping experience for consumers. In North American markets, where we have opened up stores in the last 12 months, traffic to the UGG site is up on average over 20% compared with a year ago. Further, while revenue for the UGG brand in North America through our e commerce site was up approximately 29% in total compared to the same stores a year ago to the same period a year ago, we've seen even higher sales in markets where we have opened stores. We expect this trend will continue when we open more stores in underpenetrated high traffic areas. We believe that the advancement of our omni channel strategy and the continued rollout of several consumer centric initiatives are also fueling growth for the DDC channel. Infinite UGG, which gives our retail stores the ability to sell every SKU available from the UGG brand through our in store POS system is enhancing the consumer experience, improving our inventory productivity and driving higher sales. We recently expanded Infinite UGG to all stores in North America and all concept stores in Japan and launched the program in Europe. These sales are captured in e commerce, thus contributing to the growth of total DDC. We continue to see positive results from Infinite UGG driving revenue to e commerce. As these channels continue to become increasingly integrated, beginning next fiscal year, we will only report a combined DDC comp number to reflect our omnichannel view of the business. This year, we saw our summer casuals and sneakers continue to sell well later in the season than in years past. In addition, many of our new fall casual styles carry sharper price points compared to last year. This combination of factors caused our average transaction value to decrease, which contributed in part to our 2nd fiscal quarter comp store performance. Initial sell through of our fall 2014 collection has been very solid, indicating a positive consumer response to the merchandise offering and our increase in conversion supports our belief that consumers are finding the right product at attractive price points. However, the shopper price points have made it difficult to anniversary the average transaction value from a year ago. We expect this headwind to lessen in the 3rd 4th fiscal quarters when Classics, weather and winter products become a much larger percentage of our product mix. By region, Asia Pacific DTC comps increased 13% to the same period last year, fueled by strong trends in both Japan and China. North America DTC comps rose 4% and EMEA DTC comps decreased 10%. As we head into the busiest selling period for our DTC channel, in which close to 80% of DTC revenues are generated in the 3rd 4th quarters, we feel good about our prospects for growth and believe that we can improve comp store performance. Our optimism stems from several initiatives. Beginning with marketing, our This is UGG campaign, which successfully positioned UGG as a year round premium lifestyle brand through our casual and fashion offering during the 2nd fiscal quarter, shifts to showcasing our classics, slippers, weather boots, loungewear and gift giving products for the holidays. Our mix of marketing activities is heavily geared towards driving traffic to our brand and driving demand online and in store for key styles. We are doing this through an elevated focus on paid media and search optimization. As Angel mentioned, our holiday programs launched November 17th and the number of activations will ramp up over the Black Friday and Cyber Monday weekend. This includes Europe, where we historically have held back the majority of our marketing dollars until the weeks right before Christmas. For this holiday, we are elevating service across all our DTC channels to make it as easy as possible for our consumers to purchase our products. We've expanded our retail inventory online feature to all concept stores in North America and the UK and are seeing really good customer response to buy online, pick up in store or as they call it in Europe, click and collect. We'll also be providing same day delivery service in our Manhattan stores as part of our holiday concierge message that highlights how we can make the consumer shopping experience easier during the busiest season of the year. And of course, consumers can buy online and return to any store or vice versa, which is whatever is easier for them. We'll also take returns on product purchased from authorized UGG brand retailers. We believe consumers will respond favorably to our omnichannel capabilities and find that we offer a level of in store technology and service that is above and beyond many other retailers. To fully maximize the potential of our brands and our omnichannel vision, we plan to continue to expand our physical and digital footprint. Year to date, we have opened 18 new company operated retail stores, including 10 in Asia Pacific, where we currently experience the highest returns and highest productivity and 8 in North America, which have been a mix of high return outlet locations and high traffic concept stores in major metropolitan cities. Included in our new fleet is a technology driven concept store in Tyson's Galleria just outside Washington, D. C. That will open next month. In this store, we will integrate elements of online shopping into the brick and mortar experience as we test ways to potentially develop more efficient concept stores for the future. This winter, we are also testing pop up locations, including our first ever UGG Lounge store. This store will feature our luxuriously comfortable slippers, loungewear and home products and will be open from October to early February. Finally, with respect to our D2C expansion, we launched new country specific e commerce sites for the UGG brand in Germany and Italy during the 2nd fiscal quarter. And in fact, we were recently named the top Internet site by Elle Magazine in China. Similar to the U. S, this is a key fashion publication in China and the award demonstrates our progress in delivering an attractive and compelling online experience. Turning to our international wholesale and distributor business, our newly formed Germany subsidiary has gotten off to a very good start. Our strong performance in Germany during the 2nd fiscal quarter reinforces decision to convert from a distributor model and take more direct control of our brands in this large and important European market. Specifically in the UK and France, traffic was challenging at the majority of our key wholesale partners due in part to the challenging macroeconomic conditions and average temperatures that were 10 degrees above last year during August September. Looking ahead, our fall pre work in Europe is up nicely over last year, which is a positive sign for the health of our brands in the region. And therefore, if we get normal winter conditions in Northern Europe, we'd expect solid sell through to drive reorders during late Q3 and Q4. In Asia Pacific, we launched our partner retail program in China, which for reporting purposes are treated as wholesale accounts. During the Q2, 9 partner doors in total opened while at the same time we transitioned 7 company operated stores to the partner program. These were locations that were outside major metropolitan cities, which we believe will be better served by local market operators. This will allow our China team to better focus their time and resources on driving sales and stores that are in the 9 cities that we've identified as providing the best returns on investments. We expect an additional 5 partner doors in China to open by the end of this fiscal third quarter. In summary, we believe our global omnichannel strategy is paying off and that the initiatives we are driving across all channels have put us in a sound position heading into the busiest selling season of the year. From an organizational standpoint, we've made great strides in being able to better micro merchandise our assortments by country and execute more targeted marketing campaigns that connect with consumers on a more individual basis. Despite our store comp in the 2nd quarter, which was a relatively small percentage of the total we are confident that our multi channel approach has given us the levers to react to global trends and challenges. Our nimble marketing capabilities, product diversification and evolving retail model, which now includes pop ups and partner stores, is helping us quickly adjust plans in season to drive category and channel growth. We believe that our initiatives will continue to elevate our brands above the competition and once again make UGG the number one most desired brand this holiday season. With that, I'll turn the call over to Tom. Tom? Thanks, Dave. As Linda reminded everyone at the beginning of the call, we posted the quarterly financials to our IR website. So my comments on the call are going to be brief and focus primarily on the guidance. We had a strong second quarter. We exceeded our revenue guidance by approximately $22,000,000 and exceeded our EPS guidance by $0.19 The upside in revenue was driven mostly by timing of domestic and international wholesale sales, which shifted into the Q2 and out of the Q3. The $0.19 EPS increase over guidance is due to the higher sales recorded in the quarter, combined with a shift to some planned marketing expenses to the 3rd fiscal quarter. We plan to increase marketing expenditures in Q3 and Q4 to drive traffic to our brick and mortar locations and to our online sites. Based on the UGG brand's 2nd fiscal quarter performance, strong backlog and e commerce trends, we are raising our full year outlook. For the fiscal year ending March 31, 2015, we now anticipate revenue to increase approximately 15% to $1,825,000,000 up from the previous guidance of 14%. UGG brand revenue is now projected to increase approximately 14% versus our prior expectation of approximately 12%. Diluted earnings per share is now expected to increase approximately 15.8% to $4.71 up from our previous guidance of 14.5% growth. This guidance assumes a gross profit margin of approximately 49% and SG and A as a percentage of sales of approximately 36% and an operating margin of approximately 13%. Our fiscal year 2015 guidance assumes that the company's effective tax rate will be approximately 29%. Wholesale and distributor sales for all brands are still projected to be up low double digits in fiscal 2015, driven by our Germany conversion, a high single digit increase in UGG domestic sales and continued growth of the HOKA brand. For our DTC channel, our overall sales projections have increased slightly due to the stronger e commerce trends for the UGG brand, which are being partially offset by lower store comp projections of flat to down slightly. We are now planning for the addition of approximately 30 new stores this fiscal year as we shifted some of our planned concept stores in China to partner stores. For the Q3 of fiscal 2015 ending December 31, 2014, we currently expect revenues to increase approximately 10% compared to the same period in the prior year and diluted earnings per share to increase approximately 10% to $4.46 per share compared to the same period in the prior year. For the Q4 of fiscal 2015 ending March 31, we currently expect revenues to increase approximately 10% compared to the same period in the prior year and we expect diluted earnings per share of $0.15 per share compared to a loss per share of $0.08 for the same period in the prior year. Finally, we recently completed our sheep negotiations for fall 2015 spring 2016. Lower sheepskin cost per square foot and lower cost to produce UGGpure along with higher UGGpure usage will result in a mid single digit decrease compared to the last year. This benefit will partially be offset by higher prices for other raw materials, namely leather and an expected carryover of sheepskin inventory at higher prices. Based on these factors, we believe this will contribute roughly a 40 to 50 basis point improvement in fiscal year 2016 gross margins over projected fiscal year 2015 levels. Lastly, we want to let everybody know that we will be hosting our 1st Investor and Analyst Day at our new headquarters on June 18, 2015. I'll now turn it back over to Anhil for the closing comments. Thanks, Tom. Well, the changes taking place in the retail environment are nothing short of dramatic. The consumer is now completely in charge and is dictating what distribution models will work and what models will fail at a rapid pace. The days of visiting the mall to peruse and shop have changed and are evolving. It's all about building strong brands and creating access to product through integrated multichannel distribution platforms that make it as convenient as possible for consumers to review and purchase the products they want. And we believe that the investments we're making to further develop and strengthen our brands, to build our DTC footprint and evolve our omnichannel strategy are driven by this dynamic. The consumer is at the center of everything we do and we believe our efforts to date are in fact positively transforming our growth trajectory. We're better connecting with and serving consumers on their terms. The recent change in our corporate identity to Deckers Brands reflects our successful transition from a domestic footwear wholesaler into a global multi brand operator. Also encompasses the dynamic nature of our company, our talented employees, the breadth of our quality, innovative products and our commitment to providing consumers with seamless shopping experiences. Not too long ago, we facing an increasingly volatile market for sheepskin that was impacting our margins. We addressed this challenge head on through the rapid development and rollout of UGGpure, which allowed us to strengthen our footing significantly in negotiating and stabilizing prices. At the same time, OutPure has allowed us to expand our product line and diversify into new categories, supporting our ability to deliver robust growth in a less than perfect environment. The development of this initiative and this innovative new material speaks to the nimbleness and the adaptability of this organization. It gives me great confidence that we can continue to stay ahead of the pack as the global marketplace continues to evolve. As a whole, the industry is seeing traffic declines and macro shifts. We believe that our omnichannel approach will put us in the optimal position to address these macro shifts in the retail environment. We plan to continue to learn and adapt our strategy as necessary to address these issues in real time. Going into our peak selling season, we believe that we can continue to drive strong sales and earnings growth, notwithstanding a mixed macroeconomic backdrop and continued pressure on the consumer. We believe we're making the right choices and making the necessary investments in our business to not only adjust to how consumers shop today, but to thrive in this continually challenging global retail environment. But we can never rest, and along the way, we'll continue to refine our strategy and stay ahead of the curve with the goal of ensuring that we maximize our results for the benefit of our shareholders while supporting the long term growth of our brands. Operator, we're now ready for questions. Thank you. And we'll take our first question from Bob Drbul with Nomura. Good evening. Good evening. Good evening. I guess I have two questions. The first one is for Tom. On the shipments that went from the Q2 into the Q3, can you just talk can you put any numbers around that? And just similarly the marketing dollars that you're increasing, can you just quantify either the percentage or how we should be thinking about that expense as we look into the I guess your Q3 now? Yes. So Bob, it was some shifting of some revenues from the Q3 into the Q2. And if you look at I'll give you a couple of answers to this. So it was about $22,000,000 revenue beat, about $15,000,000 $16,000,000 of that roughly was related to the wholesale business and that equated to about 2 thirds of the EPS beat. Then the balance was and the balance of the beat about 1 third of the EPS beat was due to expenses and that's about $4,000,000 of marketing kind of expenses. And we'll take our next question from Camilo Lyon with Canaccord Genuity. Hey, guys. Nice quarter. I wanted to just get a little bit more detail on what you're seeing from your wholesale partners since they've clearly increased their deliveries with you. Does that mean that this is fast forwarding the reorder window for you? Or are they just wanting to have more inventory on the floor earlier in the season? I'm just trying to parse out the trajectory of this fast forwarding of deliveries and how that could affect the reorder window? Hi Camilo. Yes, we've had good sell through so far on the fashion styles, so which I think has given people a lot of confidence. There was also as we went into the season, pretty low inventories on product. I think retailers last year were caught short of inventory. So we've had people really step up in anticipation of normalized selling, wanting to make sure they're not caught like they were last year. And the other component is the sell through of a lot of the new styles and classic derivatives. For example, I think that that's been very well received. It was it's sold in very well. There's a lot of anticipation in the early response that that's going to perform. And again, I think people want to make sure they're covered with inventory. And we'll take our next question from Evelyn Kopelman with Wells Fargo. Thank you. Great quarter. My question is on some of your comments around the comps. One of them is you mentioned the average transaction value was down and your expectation maybe that headwind will lessen into the next two quarters. Can you put some quantification around that in terms of maybe how much of a pressure it was and how much it will go away? And then secondly, you also mentioned comps in the Western U. S. And Europe where it was warm were tougher. Can you give us any commentary on how comps were in the other regions to maybe give us an indication of more normalized comp trends? Thank you. Sure. So to address the comp issue, one of the things that happened this quarter is that the summer selling season extended. So, what happened with regards to the AUR and our average transactions in our stores is, the consumers were coming in and they were purchasing our conversion was up 15% globally in our retail stores. But what they were purchasing was sneakers, summer casuals, more transitional product versus last year at that time, they were purchasing more boots. And so, what we've seen is the weather has impacted traffic in places like Europe and Eastern United States and has delayed the fall selling season a little bit. In markets where the weather has cooperated and has been a little bit stronger in other regions, we have seen much better comp results. And so our expectations for going forward is that when that kicks in and our selling season kicks in, the mix of product will shift away from that summer casual transitional sneaker business into our core competencies of boots, winter product, going into the holiday season. That will help dramatically in our AUR, which will increase. We're estimating about 5% increase in our average transaction price from Q2. And we'll take our next question from Randy Konik with Jefferies. Can you hear me? Yes. Yes. Can you hear me? Yes. Yes. Great, great. I guess, can you elaborate on a little bit more on where you think inventories are in the channel right now and from your wholesale customers? I guess second, can you give us a little bit more kind of thought process around the color around the gross margin guidance for I guess next year around UGGpure? Is that something that's kind of conservative? And I guess the other thing is how are we thinking about the potential for SG and A leverage next year? And finally, from your wholesale customers, how are they kind of ordering from on the classic side versus the fashion side of the business right now? Thanks. So I'll maybe tackle some of those. The first one inventory in the channel, inventory in the channel is very good. We feel really good about where that is. We always have a close collaboration with our wholesale customers on that. So we feel very good where that's at. Gross margin sheepskin, I think those are our best ability to stabilize our largest commodity cost and continued we're on track from a strategy point of view of utilizing UGGpure and we continue to see the benefit of that. Leather didn't help, but the good news, we had benefit from UGGpure usage and sheepskin contracts that could help offset off that as well. So we feel really good where that's at. Go ahead. And regarding the SG and A leverage, yes, that's certainly still the plan. We expect to gain leverage next year. I think you see this performance as well as some of our guidance here. We've done very well starting to eat into that ability to gain leverage. That said, with the opportunity we have with all our brands, this omnichannel strategy, we're going to make the appropriate investments to drive a much bigger company here. And we'll take our question from Tepush Bari with Goldman Sachs. Hey, guys. Congrats. Tom, so did the quarter effectively meet your expectations? I know there were a few shifts around timing and expenses. But I guess A, did the quarter meet your expectations? And then B, how are you thinking about the UGG wholesale growth for the year now? I don't know if my notes are stale, but it looks like the last we heard it was an up high single digit growth rate. Adjusted for these shifts, it looks like you're running up 20% through the 1st 2 quarters of the year. Yes. Regarding the first question, we feel really pleased where the quarter ended up. And we described all those drivers. And regarding our wholesale and our distributor business for the year, the entire company we talked about low double digits. UGG would be lower than that because we've got some strong double digit growth with Sanuk, Teva and HOKA. And we'll take our next question from Sam Poser with Stern and Aggie. Thank you. Good afternoon. Just a couple of things. One, can you tell us you'll say it in the queue, but could you give us what the UGG wholesale dollars were for the Q2 please? UGG wholesale global dollars were about $340,000,000 Okay. And then I guess the other question is you said on the last call, you inferred on the last call that the gross margin would be up in Q3 around the same it would be up in Q2. But it looks like you were up more than you probably anticipated in the Q2. So how is that playing out? Yes. I think Sam good that is a little bit more sheepskin and a little bit more benefit in the quarter from the Germany conversion than we originally anticipated. And we'll take our next question from Jeff Van Sinderen with B. Riley. Good afternoon. I'm not sure if you broke out what the actual Good afternoon. I'm not sure if you broke out what the actual brick and mortar comp was in Q2. And then I know you gave some commentary around that for Q3, but just wondering what your plan is for brick and mortar comp for Q3? And then also can you give us more color on the currency translation impact if there was some in Q2? And then also what you have factored into your guidance for Q3 for currency translation? Thanks. Currency for this quarter had not much impact, both the top line and the bottom line. Between we've got business in with the euro, with the pound, with the Japanese yen, they sort of balanced out relative to the prior year. And we also have some natural hedges with the operating expenses there. So the net impact on earnings per share was relatively small, albeit a little bit positive relative to the prior year. I think we did break out the brick and mortar comp that was in the press release. That was a negative 8%. Negative 8%. 8.8%. 8.8%. And we'll take our next question from Scott with Buckingham Research Group. Yeah. Hey, guys. Thanks. Just one clarification first. The store counts that you're giving us are those net of conversions? And then secondly, in terms of the product line on Health, this seems to be the 1st year where you're using UGGpure to diversify the line and extend it. Maybe I'm sure we'll see it at Fannie in December, but maybe talk about how that's evolving for next year, how much bigger the fall line can be? Well, I think we'll continue to do what we've been doing and that is to build on categories of product that we know we can successfully exploit, meaning that we saw fashion boots as an opportunity. We clearly saw an entry point with UGGpure that allowed us to really develop the kind of product that we knew we needed, and we will continue to evolve that. Twinsole on the men's side has been a very important use of UGGpure. We'll continue to drive that. We think there's categorization opportunity there. Our slipper business continues to evolve very, very nicely. It's very diversified now compared to what it used to be. As you saw, we also have some new product coming out. And again, if you haven't seen it, you'll see it during Fannie in Treadlite, which is a very light, it's a SARMAT material that a version of which is used for HOKA. Extremely comfortable, easy to wear product that sort of partners with our slipper concept, but is for more streetwear. So again and then the other thing is that continued what we call the UGG classic derivatives, which are always a fun place for color and materials and doing things that round out the full assortment. So I think that the it's hard to even explain how much of a liberating component UGGpure has been to the design team and the ability for us to really see no limitation in the kind of product we can create and the categories of product that are now available to us without having the product look distorted because of the thickness of the shearling. And I think that that's really been super important for the brand. Scott, just to answer your other question, the store count is net of the China conversion stores. And we'll take our next question from Eric Tracy with Janney Capital Markets. Hi, guys. Good afternoon. Congrats on the quarter. If I kind of 2 separate, 1 wholesale and then 1 DTC. I mean, 1st in the wholesale, I just kind of want to clarify, again, we're talking about a shift of revs out of 3Q into 2Q. But is it an absolute shift or is it really just sort of a pull forward again of your retail partners wanting to be better positioned and therefore the reorder still very much could come through in 3Q. That would be on the wholesale side. And then on DTC, again, I appreciate the seasonal sort of aspects that are potentially a drag on the brick and mortar comp. Is there any kind of thought at all in terms of structurally potentially the e comm business cannibalizing a little bit of brick and mortar? And then lastly, just in terms of Europe DTC, again, do we believe it is all seasonal or anything on a go forward basis from just the macro that gives you some concern? I'll answer the wholesale question, Eric. The shift is timing. Customers wanted it earlier, so they had an opportunity to get it on the shelf and it can turn more. And therefore, it does have the opportunity to produce more reorders if that were to occur. Yes, Eric, with regards to e comm, I'm certain that there is some cannibalization to our stores. I think we're seeing that in the marketplace. The consumer is shopping more online. They're starting online before they go to stores. So, I think there is an element of that happening to everybody and certainly embedded in our numbers as well. What we are seeing though, which is a very positive sign, is how stores are fueling e commerce in some regards as well. Like I mentioned in the script, in locations where we've opened new stores, we've seen increased penetration in traffic and conversion and sales on our e commerce site from those locations. And at the same time, we're driving incremental sales to e commerce site through Infinite UGG, which is sales that we wouldn't have had if we had not had the store there. So, it's like we said in the last call, the 2 concepts are feeding each other. E commerce is feeding stores and stores are feeding e commerce and I think that's going to continue. And our model is gearing us up to be ready for that changes in the marketplace and the consumer shopping behaviors, which I think will benefit us long term. With regards to Europe, it really comes down to the fact that September was 10 degrees warmer this year than it was last year and that's had an impact on the total market. I was speaking to our Head of our Wholesale Business in EMEA just this morning and he said that the entire footwear market suffered from that effect. It doesn't give us a huge amount of concern going forward. I know that when the weather shifts, we'll be ready for it, both in wholesale and DTC. But with regards to DTC, our e commerce business continues to be strong and we're still slowly getting back into the retail game over there. But our focus will be on Germany for stores next year. Outside of that, I don't see a lot of new retail locations in Europe other than just Germany for next year. And we'll take our next question from Carina van der Kinst with Citi. Hi. Thank you. As a follow-up to the last question, with the earlier shipments and possibility of more reorders in the Q3, how much capacity do you guys really still have given your tighter inventory management to chase the outlast demand? And just a bigger picture question. I was wondering if you could talk about how you're feeling about the consumer and the winter weather expectations as we get closer to holiday? Has your view on either the consumer or the weather changed since we last spoke to you? Well, I can let me just start with that last question. The consumer right now, I'd say that there's a lot of pressure on consumers and so many things happening in the not only the macro environment in Europe, but certainly people being nervous about various scares that are being put out in front of them from Ebola to whatever else. We're seeing some positive signs around our products. Our brands continue to be in high demand. We're seeing great initial read on our new product for this fall. We think that the diversified product offering has made a huge difference for us. We're being cautious, however, in understanding that consumers are probably going to be out there a little later than normal. That'd be my guess. We've also noticed in the last few years that colder weather seems to come a little later than it has in the past. And I think that that's informing some of, I think, our retailers in terms of when they want product. They want to make sure they're covered early in the season and they want to make sure that we can support them if we get like we had last year, a very extended selling season that goes into what was our Q1 last year would be Q4 this year. So and we're in good position around classic product for those kind of fill ins. And that's really how we build our fill in inventory. We don't fill in product that is strictly say fashion and very seasonal. Those very limited fill in opportunities on those, but our strength is slippers and classic, we're in good shape on those and we historically have been able to meet retailers' needs in what will now be the Q4. The other thing to mention there is that, for the Q4, this year, we are in a much better inventory position with winter product. Last year, we saw high sell throughs and we ran out of product last year going into February. This year, we're much better positioned with winter product and also spring relevant product, which is waterproof and water resistant sheet skin at the same time as well as new transitional boots that will bring us into the early spring season. And we'll take our next question from Omar Saad with ISI Group. Good evening. Thanks for taking my question. Follow-up on UGGpure and Iheart UGG and update there. How you're seeing UGGpure perform with consumers in some of the non traditional categories? And then also the Iheart UGG platform, how is that fitting in? Are you comfortable with how it fits in within the kind of broader UGG brand? Yes. As far as UGGpure, we've had 0 pushback from consumers. It's been extremely well received. What we did up front, as we said, it has to be indiscernible in terms of consumer value and what it delivers from a field point of view and we've achieved that. It is 100% virgin wool, so really nothing is different in terms of what's contacting your skin. It's just that the method of production has changed and obviously benefited us. In terms of Iheart UGG, as we said, that was a test and that is a test this fall season. We're satisfied with the performance as you know with limited distribution. We are still waiting for our primary selling season to kick in for the colder weather to come and that's when we'll see where we stand on that product. We have, however, continued to evolve that product line. We'll be introducing some for spring, some new product and sneakers and accessories, which are very compelling and all the key price points are met. And so we're going to see how this test goes here in this next quarter and we're able to react accordingly. But so far so good. We're feeling pretty good about it at this point. And we'll take our next question from Christian Busse with Credit Suisse. Yes. Hello. I was wondering if you could provide some perspective on how you're thinking about the development of the European market over the next 3 to 6 months? And what regions are you seeing particular strength in? And where are there some challenges? Sure. I think we talked about this a little bit on the last call. Europe presents a pretty dramatic opportunity for us, not only for the UGG brand, but also Teva and HOKA. From an omnichannel perspective with regards to UGG, we see still strong opportunity in e commerce and retail stores. We just opened our Germany site and our Italy site for e commerce. That's going to provide some long term growth for us and better connection to our customers. Germany presents the biggest opportunity right now that's in front of us having just flipped that to a sub. And we'll continue to look at other markets down the road as time evolves and those markets evolve to see if there's other opportunities for that. So, the brand is strong right now in Europe and I think we've got to elevate our game with regard to an omni channel presentation, both in wholesale and retail, which will drive incremental growth. But then the market transition of Germany will provide the biggest upside there. In addition to that, we're also taking a serious look at our partner retail model over there and I hope to be in a position in the next 6 months to be able to say we're going after that in a more aggressive manner with some key partners outside of Western Europe where we can provide incremental growth in some of those emerging markets as well. And we'll take our next question from Laurent Vasilescu with Macquarie. Thank you very much. Good afternoon. It was mentioned last quarter that about $17,000,000 of inventory was advancing the Q1 to mitigate a potential port strike. It sounds like the longshoremen are still at the negotiating table. So I was wondering if you could provide a little bit color on your contingency plans for deliveries going forward? And then the second part is on Anew. I believe it was recently highlighted that the brand will roll out footwear for yoga market. So could you provide a little bit of color on that front? What's the opportunity in terms of revenues? When can we see a product in the marketplace? Thank you very much. On the port strike, you're right. We did anticipation of this strike, we did bring looked at what was due, brought in about $17,000,000 $18,000,000 of inventory last quarter. We still consistently and constantly evaluate that and keep an eye on that. So most of it is here. So there's not much risk there at all. The only risk that we are anticipating is that we may see a 7 day delay in some shipments if in fact the slowdown gets more aggressive. But other than that, I think we're in good shape from an inventory point of view. There should be no risk to what we're looking to ship in the quarter. As far as Anu goes, very exciting to see that product. We'll just now be showing it at the sales meeting coming up. It's a fall 2015 product offering. So it's too soon to tell, but we're very excited about the potential. The brand has many, many fans in the yoga world, and we think we've got some very innovative product to put forward. So stay tuned on that because we haven't even shown the product to our sales organization yet. So but there is a lot of excitement, I will say that. And we'll take our next question from Erinn Murphy with Piper Jaffray. Great. Thank you for taking my question and congrats on a very solid quarter. Dave, I just had a clarification question for you on the e commerce side of the business. So when a consumer is shopping using Infinite UGG, does that sale get recorded as e com? And then if so, what percent of your e com business today is store fulfilled sales? And then where do you see that potentially moving over time as we continue to see this kind of change in broader customer behavior? Yes, great question, Aaron. It's a pretty exciting project that we tested last year and we've seen dramatic increase in those Infinite UGG sales. In fact, it's up over 100% since we launched it in the same stores a year ago. It does get booked as an e commerce sale, but we from a store perspective, we motivate the staff by including that in their overall store sales from accounting perspective, so they get credit for the sales. But as far as how it's booked, it's an e commerce sale. So far, I think it's roughly just under 4% to 5% of total e commerce sales. And we haven't put a number as a target as to what we think it could be, but it is continuing to increase. And as we open more stores and more locations, that's going to become a more significant part of the e commerce business. The other big benefit of that obviously is we gain all that consumer data and we can retarget them where we can build that relationship through the long term CRM program. And as I also mentioned in the call, the Tysons Galleria store that we will be opening up in November will be our best foot forward as to how we can combine those two worlds. And so, it's more of a digital shopping experience in the store. It's much more interactive. And I think you will see the opportunity for us to continue to drive sales to both stores and e commerce through a more technology driven digital experience in that store as well. And we'll take our next question from Chris Svezia with Susquehanna Financial Group. Good afternoon, everyone. Thanks for taking my questions. Nice job. Dave, for you, just on the DTC, the physical stores retail comps, just confidence in that rebound to get to sort of flattish to slightly up in the back half of the year. Just so I understand it's in part improvement in the seasonality of the business, AUR, marketing and better in stock. And the second question I have Tom for you, just to clarify gross margin and SG and A sort of the cadence Q3, Q4 between year over year growth. Is most of the gross margin improvement Q4 or is it pretty evenly balanced and how do we think about SG and A dollar growth between Q3 and Q4? Thanks. Yeah, Chris. Good question on the comps. Right now, the way we look at Q3 and Q4, this is our prime selling season. This is where we're at our best. And it's our best foot forward, as far as I'm concerned, from a product offering, an in store experience, an omnichannel capability perspective and our ability to target and market consumers and drive them to our channel. So, I have a lot of confidence in our team's ability to execute. And in places where we have seen some cold weather turn, we're seeing strong results. So, I don't look at Q2 results, particularly September, as an indication of what's going to happen going forward. I see us more normalized seasonality going into Q3 and Q4, getting us back to more normalized comps. The traffic has been a bit of a challenge in warm weather locations when that turns really fine. Conversion is up 15% over the last quarter and that will continue. And when we get into a higher mix of price points through classics, winter and weather appropriate product, we'll see our ASP continue to increase as well. So, I would say the combination of all those things, and just being ready and be able to react quickly to the market trends, particularly, and also into our outlet stores where we have much stronger product than we've ever had before. I think our prospects are pretty strong to get us back to a more healthy comp rate. Chris, on the gross margin, the 4th quarter, there will be modest gross margin expansion. There will be good gross margin expansion in the Q3. From an SG and A growth perspective, the Q3 has more SG and A growth relative to the Q4. 3rd quarter is more marketing, more stores. In the Q4, there's mid single digit kind of SG and A growth. That's because the prior year there was significant amount of expenses in the Q4 as we closed the year off that at this point in time the way we're guiding won't necessarily recur this Q4. We'll take our next question from Jim Duffy with Stifel. Mr. Duffy, your line is open. I'm sorry about that. Good afternoon, everyone. Nice quarter. Couple of questions. Tom, saw strong gross margins relative to plan in the Q2. Why not a more optimistic view on gross margin for the full year guidance? Are you just being conservative here? Or is some rationale why the strength wouldn't continue? And then secondly, Angel, in response to Camilo's question, you mentioned strong sell through of fashion products during the Q3. You didn't comment on classic sell through. Can you offer some comments there? And I'm curious if you're seeing compressed sell through season for the classics that makes the 2Q sell through commentary less relevant? Jim, relative to the margin, the difference there is the quarter we just completed was a big quarter for Germany and the conversion had a significant impact, whereas the subsequent quarter, it's not as big a quarter for Germany and doesn't have the same impact. As far as Classic goes, it's still early. We know from patterns of past years that the Classic business, especially as we've diversified the product offering, what we define as Classic now versus a few years ago is a very, very broad assortment of product including derivatives. So we're seeing great sell through on classic derivatives right now. Those classic derivatives by the way feature many waterproof products, which I think it's raining on the East Coast and we just happen to run some e mails and media on our waterproof classic derivatives today. So the main season for core Classic is now probably later than it used to be when that's all we had. So people are satiating their need for Classic with a variety of other Classic And we expect that as the holidays get closer, the core Classic will kick in as it typically has done along with Slippers sort of the tail end in late Q3 and Q3 rather late Q2 and Q3. And we'll take our next question from Mitch Kunis with Robert Baird. Yes, thanks. Couple of questions. Tom, on the Q3 guidance, just remind us what your assumption is around reorders and cancellations relative to last year? And then I'm not I'm still I guess I'm not sure I'm clear on the comp for Q3. I thought you'd said in your prepared remarks kind of flat to down slightly for the year on store comp. What is it for Q3 specifically? And then help me get to the Q4 guidance because you're talking about $0.15 of earnings. In that quarter, it seems like the earnings for the last few years kind of gotten worse and worse and worse year over year. And now you're expecting that to bounce back pretty nicely. So help me understand how you get there. Thank you. On the Q4, we've got significant growth from HOKA, significant growth from Teva and Sanuk. Obviously, some more growth from UGG as well. We'll have more stores. We have some good gross margins. And then we're continuing to get starting to get more leverage reaching inflection point on some of our overheads in our direct to consumer business. So that helps swing the needle from a lost quarter to an earnings quarter. So that's the answer on that. What was the first question on the Q was it Q3? Yes. On Q3, just remind us what your assumptions are around reorders and cancellations compared to last year, which I know those came in kind of better than normal. And then specifically what your store comp outlook for Q3 is? On the reorders and the cancellations, a more normalized view of that. That's more of a mid to high single digits kind of reorders and sort of assuming at this point in time it could be the same cancellations whereas a year ago strong double digit reorders and very little cancellations. And the store comp for the year is flat to slightly down whereas in the Q3 we expect do we have that handy? It's negative 0.8. In the December quarter? Yes, Q3. Yes. So it's just pretty much flat slightly down in that quarter. Yes. The pickup in Q4. Right, with the pickup in Q4. And we'll take our last question from Danielle McCoy with Wunderlich Securities. Hi, guys. Thanks for taking my question. I guess, I was just wondering if you can give us a little bit of color on some of the locations of the pop up stores, how long you think they'll be open and when they'll be open? Thanks. Yes, Danielle, great question. We see this pop up as a test this year. We see this as a potential great long term strategy for our omnichannel network. We opened up a store in Square 1 Mall just outside of Toronto. It's a 6 month lease. And the way we look at this is, it's an opportunity for us to get into underpenetrated markets, locations where we either want to test to see if it's viable for a long term lease for a store or to just take advantage of the peak selling season. It's great because it's a low build out cost for us. It's in our core selling season. So, we optimize profitability and there is a healthy return on those sales over the 6 month period. So, it's a test right now. Initial results in the Square 1 mall have been very strong ahead of plan, which is encouraging. And then actually just today, we opened up our 2nd pop up in the US in the Walt Whitman Center on Long Island, which is a lounge focused store concept, which showcases all the lounge and home product and slippers. And so, we think that this is a great test that will enable us to be much more flexible in the future, expand our footprint in a more cautious way in some of the locations we might want to test. And we're also doing this internationally as well. So, the hope is that we learn from this. There's a successful model here that we continue to work on and we use this next fall in a more aggressive manner. It appears there are no further questions at this time. I would now like to turn the conference back to management for any additional or closing remarks. Well, thank you, operator, and thank you all for joining us on the call. Let me just say that we are confident in our strategy. We're confident in our execution. We know this is now pedal to the metal time as we move into our primary selling season. We're not taking anything for granted and we're certainly not letting any assumptions get in the way of our execution and our performance. We're driving to every opportunity that we see in the market around the world. So, I look forward to talking to you on the next call and really appreciate your participation today. Thank you.