Earnings Call: Q2 2013

Jul 25, 2013

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Deckers Outdoor Corporation Second Quarter Fiscal 20 13 Earnings Conference Call. At this time, 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. Remind everyone of the company's Safe Harbor policy. Please note that certain statements made on this call regarding the company's expectations, beliefs and views about its future financial performance, brand strategies and cost structure are forward looking statements within the meaning of the federal 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. These statements relate to the company's anticipated revenues, expenses, earnings, gross margin, capital expenditures, brand strategies and cost structure as well as the outlook for the company's markets and demands for its products. The forward looking statements made on this call are based currently I'm sorry, are based on currently available information. And because its business is subject to a number of risks and uncertainties, some of which may be beyond its control, actual operating results in the future may differ materially from the future financial performance expected at this current time. Deckers has explained some of these risks and uncertainties in its earnings press release and in its SEC filings, including the Risk Factors section of its annual report on Form 10 ks and on its other documents filed with the SEC. Listeners are cautioned not to place undue reliance on forward looking statements, which speak only as of the date hereof. The company undertakes no obligation to publicly release or update the results of any revisions to forward looking statements. I would now like to turn the conference over to the President, Chief Executive Officer and Chair of the Board of Directors, Mr. Angel Martinez. Please go ahead, sir. Well, thank you to everyone joining us today. With me on the call is Zohar Ziv, Chief Operating Officer and Tom George, Chief Financial Officer. In addition, I'd like to introduce Linda Pazen, our new VP of Investor Relations and Corporate Communications, who is also on the call. The Q2, while our smallest volume quarter, was an important transition period for the UGG brand that has left us feeling much more confident about our growth prospects in the back half of the year than we felt 12 months ago. The transitional product we've developed to help better bridge the gap between springsummer and our key fall holiday season was very well received by our Hill consumers customers and the initial styles that were introduced late in the Q2 have performed very well at major wholesale accounts and in our direct to consumer channel month to date. The quality of our inventory, which I'll address in more detail in a moment, is in much better shape both in the channel and in our distribution centers. It's much cleaner than a year ago and we have the key fashion styles on hand to deliver on time in early August versus last year when factory delays meant these important transitional products didn't arrive on the shelves until late September. And we believe that the combination of solid spring sell through, more compelling, more relevant product collections and much improved in store merchandising has created far better momentum across each of our regions and distribution channels at the start of this year's Q3 versus what we experienced in 2012 when we were battling several headwinds beyond our control. Despite the pressure on our Teva and Sanuk brands sandal business from cold and rainy weather during large durations of Q2, we were able to achieve sales within 2% of our guidance. Additionally, our Q2 revenue was in line with guidance on a constant currency basis. We reacted quickly by deferring certain expenses, primarily marketing, selling and retail dollars to the back half of the year to take better advantage of the busier fall selling season, which enabled earnings to exceed expectations. The 2nd quarter ended with inventories up 4.6% year over year, a growth rate that is much more aligned with sales trends than in the previous several quarters. While this was a positive development, inventories were higher than we originally anticipated driven mostly from a timing issue from us accommodating factory requests to take some small fall deliveries ahead of schedule so they can better be prepared for their peak production period. This product will be utilized to fulfill early season demand at key wholesale accounts and our expanding direct to consumer channel, which includes 36 more stores compared to this time a year ago. Lower than originally planned first half sales for Teva and Sanuk contributed slightly to our inventory growth, but we expect to work down this excess inventory over the remainder of the summer. While we're comfortable with the quality and size of our inventory as we head into our key selling season, we plan to continue to focus resources to improve the flow and timing of inventory receipts. We recently hired a new senior executive in supply chain planning who we believe will add significant improvements to tracking and management of our order status with factories. I think it's also important to note that this management team has a very good track record of turning inventory. And while our level of carryover for the past 2 years has been higher than usual due to in part to back to back mild winters, history shows that we have not needed to write off or write down significant inventory at any point and we believe that this will continue to be the case going forward. Looking at the brand's recent performances in more detail starting with the UGG brand. While domestic wholesale sell in was down modestly, the UGG brand's U. S. Wholesale customers experienced good sell through of the spring line led by the Kavar Espadrille collection, fashion sandals, specialty spring classics and slippers. This followed a very good Q1 during which cold snowy weather in many parts of the country helped drive additional sales of classic boots and other colder weather styles. Demand for spring styles as well as new transitional products such as driving moc, smoking, slipper silhouettes, ballerinas and trend right sneakers, which were introduced late in the quarter, helped drive another strong quarter for our domestic e commerce business. Our digital marketing programs are yielding significant year over year increases toward australia.com. These sales performed in our concept stores as well, specialty classics such as our new Josette boots and the companion handbags performed well early and slippers continue to sell year round online and in the concept stores. Our recent market research has reaffirmed our belief that the UGG brand remains a top tier brand relative to the competition. Approximately 80% of women in the U. S. Are aware of the brand, over 40% have considered buying the brand and about 20% have purchased the brand 25% I'm sorry, have purchased the brand. This places the UGG brand in the top 5 in their peer group in the competitive female category. This is great news and we believe it reflects the strength of the TUG brand as they gear up for their fall marketing campaign supporting their 35th anniversary. In terms of our domestic retail performance, comps were down 10% on top of a mid single digit increase a year ago. The comp decline was mainly a function of traffic, which we believe was primarily due to weather and our decision to run our spring digital and out of home advertising campaign in Q1 this year versus Q2 last year as the Q1 is a much bigger period for retail. A shift in product mix towards lower average selling price product, including slippers and casual shoes also weighed on comps. A decline in comparable transaction in the quarter was partially offset by an increase in units per transaction, which translates into more consumers experiencing the UGG brand. As we continue to develop our omnichannel strategy, we are pleased that in the U. S. On a combined basis, our direct to consumer business was up approximately 14% as our operational initiatives to drive conversion to coal. Moving on to our European business. Many wholesale customers in the U. K, our largest market outside the U. S, experienced their best spring selling season ever with YET bread. Their performance early in the year was driven by cold temperatures including the coldest March in the U. K. In more than 50 years. As weather warmed towards the end of the Q2, sales of non boot spring styles such as flip flops, fashion sandals and espadrilles accelerated. What we experienced in our U. K. Wholesale channel was also true of our direct to consumer business. Stronger first quarter results driven by cold weather were followed by a slightly softer Q2 results as sales of non boots spring styles didn't pick up until temperatures warm later in the quarter. Comps in the U. K. Were flat for the quarter. Our U. K. Results so far this year are encouraging and we have a long way to go in building added confidence. We've gone a long way as well in building added confidence in the long term viability of the UGG brand in this very important market. And you'll remember that we've faced some challenges in the last few years. We've overcome those and the consumers are responding very positively to the brand in the U. K. Now we have to make sure we capitalize on this momentum, while also replicating our progress in Continental Europe, where conditions continue to be more challenging. The results also show strong correlation between sales and weather in Europe, highlighting the need for more transitional and non seasonal products, something we're addressing in all of our markets. Now to Asia Pacific, where the UGG brand continues to demonstrate great momentum. Particularly in Japan, our retail stores comped up in the mid-twenty percent range, driven by a positive response to this year's Springlot. Comps in China were down mid single digits, a marked improvement from recent quarterly trends, which we believe is attributable to the new merchandising and marketing initiatives that we've recently implemented. We continue to believe that the UGG Asia Pacific region and I'm not just referring to Japan and China offer significant opportunity for the UGG brand and we're moving quickly but purposefully to capitalize on the prospects we've identified in each country. In addition to the 7 stores we expect to add in Japan and the 15 new stores we expect to add in China, there will be multiple partner stores by year end in all of the regional distributor markets for the UGG brand including South Korea, Taiwan, Mongolia, Singapore and Australia. Turning to the Teva brand. Sales were down year over year as reorders didn't materialize to the levels we expected given the unfavorable weather. Our sandals sales, which declined in line with the industry, were partially offset by gains in our closed toe category. As mentioned on prior earnings calls, we continue to focus on transforming the Teva brand into a more complete outdoor footwear brand in order to increase its growth prospects and lessen its dependency on weather. Our new TevaSphere technology will be expanding with new color updates for fall. In addition, we're introducing 2 new casual styles for men and 2 new boot collections for women, one of which the Capistrano is being given platinum level marketing designation by our number one retailer REI, which is a first for the brand. Before I turn to the Sanuk brand performance for the quarter, I wanted to remind everyone that the Sanuk brand started off as a predominantly male one season surf brand when we acquired them in 2011. Now we're transitioning the Sanuk brand into a lifestyle brand that will be featured in department stores, sporting goods and outdoor retailers in 2014. I'm very excited about the product that's been developed for the female consumers and that will be featured in our spring 2014 line. These changes are an important part of the growth story for the Sanuk brand. Sanuk brand sales while up 7.5% for the quarter were also hampered by cold rainy weather throughout much of the quarter. There were pockets of strength, particularly our direct to consumer channel, which was up over 80% driven by the continued strong performance of our e commerce site and the addition of the brand's first store, which opened in Santa Monica earlier this year. We're encouraged that the brand's sandal sales outperformed the industry average this season, driven by solid sell through, particularly in our women's yoga mat franchise at core independent retailers and department stores. We expect the brand will gain momentum in the second half of the year based on several new product introductions. Fall 2013 represents the first time we'll have sidewalk surfer styles in men's and women's that are relevant during the critical transition from summer to fall and holiday. We're also building off the success of our Chill collection with updated styles that are lighter weight to allow sidewalk surfer loving customers the ability to wear their favorite style deeper into the year. You'll also see new boots from the Sanuk brand, including more women silhouettes and feminine colors and patterns. We believe that our R and D efforts will transition the brand from primarily a hanging footwear merchandise brand to a meaningful player on the footwear wall in our SURF Outdoor and Footwear Specialty channels during what has traditionally been the brand's off season. I'll now turn the call over to Tom for a deeper review of the numbers and an update on guidance. Thanks, Angel. Today's earnings release contains a good amount of detail about our 2nd quarter sales and earnings including sales by brand channel and geography. Therefore, I'm going to limit my discussion primarily to gross margins, operating expenses, the balance sheet and guidance. Gross margin for the Q2 was 41.1% compared to 42.2% in the Q2 of last year. The 110 basis point decline was primarily attributable to higher closeout sales combined with higher cost of goods sold that were the result of the increased sheepskin price that we locked in at the end of September 11. The benefit of last year's lower sheepskin costs won't be realized until late Q3 or early Q4 this year. Total SG and A expense for the quarter was $112,600,000 or 66.2 percent of net sales compared to $102,300,000 or 58.6 percent of net sales a year ago. The dollar increase versus a year ago was primarily due to approximately $10,000,000 of additional expense related to our retail operations, most of which is for the 36 new retail stores that were not opened during the Q2 last year as well as higher performance based compensation expense, partially offset by a decrease in Sanuk earn out accretion compared with a year ago. Operating loss for the Q2 was $42,800,000 compared to an operating loss of $28,700,000 last year. The decline in operating margin was a result of the decline in gross margin combined with the increase in SG and A as a percent of sales. We recorded an income tax benefit of $13,800,000 in the 2nd quarter compared to $8,400,000 in the 2nd quarter last year. 2nd quarter diluted loss per share was 0.85 dollars versus $0.53 a year ago and compared favorably to our guidance for a loss of approximately $1.10 The upside relative to our guidance was driven primarily by lower operating expenses of approximately $11,000,000 approximately $5,000,000 of which we shifted into the back half of the year to take better advantage of the busier fall selling season. Regarding our retail operations for all stores opened at least 12 months, at June 30, 2013 the average sales per square foot was approximately $1500 and total square footage at the end of the second quarter was approximately 241,000 square feet compared to roughly 139,000 Square Feet at the end of the Q2 2012 representing an increase of about 70%. Turning to the balance sheet. At June 30, 2013 inventory increased 4.6% to $362,100,000 from $346,300,000 at June 30, 2012, an increase of $15,800,000 UGG brand inventory increased modestly by $2,500,000 or 0.8 percent to $311,400,000 to support the current wholesale order book as well as our DTC business growth. In addition, the balance included early deliveries of new transitional and fashion product for fall 'thirteen as well as approximately $11,200,000 is due to 36 more retail stores compared to a year ago. We are pleased with the quality of the UGG brand inventory as in line and carryover products represented approximately 90% of UGG brand inventory. The remaining 10% is inventory either in or available for our outlets. Regarding orders for in line and carryover product as of June 30, we have more orders than we have inventory. So in Q3 and Q4, we are expecting additional inventory to fulfill our wholesale order book as well as our DTC business, which has grown to over 30% of our business. In addition, we will have inventory of key styles available for reorders from our wholesale customers. With regard to our other brands, Teva brand inventory increased $3,800,000 to $24,900,000 and Sanuk brand inventory increased $5,100,000 to 14,400,000 dollars as a result of lower than expected sales for the first half of the year. Our other brands inventory increased $4,400,000 to $11,400,000 due primarily to the HOKA brand, which we acquired in September 2012. At June 30, 2013, our cash and cash equivalents were $49,100,000 compared to $114,400,000 at June 30, 2012. At June 30, 2013, we had $26,000,000 in outstanding borrowings under our credit facility compared to 0 a year ago and $33,000,000 at December 31, 2012. The decrease in cash and cash equivalents and the increase in outstanding borrowings year over year are attributable to $120,700,000 of stock repurchases over the past 12 months at an average price of $43.65 a share $64,500,000 of cash payments for capital assets, which includes 34 point $7,000,000 of retail expansion, dollars 17,100,000 for the new headquarters facility and the balance of $12,700,000 for IT infrastructure and maintenance as well as other expenditures, offset in part by cash provided by operations. During the quarter, we did not repurchase any shares of the company's common stock and currently have $79,000,000 available under the $200,000,000 stock repurchase program announced in July 2012. Now moving on to our outlook. Based on 2nd quarter results and current visibility, which now includes an increased contribution from our direct to consumer channel sales driven by the opening of approximately 36 retail stores, up from the previous plan of around 30 and stronger e commerce trends, we now expect revenues for 2013 to increase approximately 8% over 2012 levels compared to our previous expectation of 7%. For the full year, we now expect UGG brand sales to increase by approximately 7% to 8%, up from our previous expectation of 4%. We now Teva brand sales to be flat to slightly down compared to our previous expectation of 6% growth and Sanuk brand sales to grow approximately 5% versus our previous expectation of between 10% to 13%. To 13%. Our other brand sales are expected to generate $39,000,000 of revenues in 2013. With regard to earnings, we're raising our outlook and now expect diluted earnings per share to increase approximately 8% over 2012, up from our previous guidance of 5%. While second quarter earnings came in ahead of guidance by approximately $0.25 Roughly half of the improved earnings was related to a shift in the timing of certain marketing, selling and retail and other expenses, which we expect to spend in the second half of twenty Operating expenses in the back half of the year are also increasing from 6 additional retail stores we now plan to open plus additional IT investments now scheduled for the Q4. Our forecast is still based on SG and A as a percentage of sales approximately 34%. We now expect gross margins to improve an additional 30 basis points above our previous expectation of approximately 46.5 percent driven by increased contribution for our direct to consumer channel. For the year, capital expenditures are projected to be approximately $85,000,000 to $90,000,000 with $40,000,000 for retail stores and approximately $40,000,000 for the corporate facility IT and other maintenance items. And we are still planning to refinance our corporate headquarters by securing long term financing. For the Q3 of 2013, we expect revenues to increase approximately 2.5% and diluted earnings share to decrease approximately 41% over 2012 levels. For the Q4 of 2013, we expect revenues to increase approximately 14.5% and diluted earnings per share to increase approximately 38%. This quarterly EPS guidance is in line with our previous disclosure. And as a reminder, roughly 85% to 90% of our projected second half earnings are expected to come in the 4th quarter. I will now turn the call back over to Angel. Thanks, Tom. As we take stock of where we are at the halfway point in the year, I'm pleased with how the first half has unfolded following a challenging 2012. Obviously, there are always areas of the business that we can improve upon and there will control there will continue to be factors impacting us that are outside of our control. That said, I think we're taking the right steps toward affecting positive change at Deckers this year and more importantly over the long term. We could not be more confident about our products pipeline that we have in play for fall 2013, which is feeding into 2014. I believe fall 2013 is the UGG brand's strongest and most complete line that we've developed. We've made great progress in 1 year to broaden the appeal and accessibility of the brand, including having more transitional product to help bridge the gap between late summer and the start of fall weather to more attractive opening price points in our casual and fashion collections combined with non core products that better reflect the UGG brand DNA and a broader lineup of specialty classics. And while still very early, sell through so far in July supports this thesis. In the U. S, wholesale inventory levels are much cleaner than they were a year ago. We believe that our retail partners are equally excited about the freshness of the fall line. In Europe, we feel like we've turned a corner with the UGG brand in the UK And with good momentum coming out of Q2 combined with a much stronger product line, we're encouraged about our prospects for growth this coming holiday season. We believe that Asia continues to be a source of growth and opportunity, particularly for retail expansion in China and Japan. As we make additional investments to our merchandise offering and marketing programs based on a better understanding of the regional differences between East and West, we believe that we can build market share in these 2 large important consumer markets. We look forward to updating you again in about 90 days when we report our Q3 results. By then, we'll know a lot more about our sheepskin needs and costs for 2014, which at this point would be premature to comment on. And by late October, we'll have much better visibility in how the holiday season is shaping up. Given the unpredictability of weather, especially what has transpired in the last two winters, I think we're taking the right approach to planning the business for the remainder of the year, while at the same time investing in new products and new processes that both mitigate our dependence on weather and create new growth vehicles for the future, including the specialty running category where HOKA, our newest brand addition, gives us an immediate and legitimate platform to compete. With a strong balance sheet and strong cash flow, we're well positioned to execute on the strategic plans for evolving each of our brands and driving sustainable earnings growth and increased shareholder value well into the future. Operator, we're now ready to take questions. Thank Our first question today comes from Erinn Murphy, Piper Jaffray. Please go ahead. Great. Good afternoon and thank you for taking my question. On Hal, I guess my first question is for you. Just you commented earlier on in your script about the direct to consumer business kind of month to date commented earlier on in your script about the direct to consumer business kind of month to date is starting to improve. I'm just curious if you could expand upon that comment. Is it you're seeing it more in traffic or is it ticket based and what styles is the consumer right now gravitating towards? Well, we've had actually pretty consistent performance across our entire DTC from e commerce business to our own stores, the Kavar as I mentioned, consistent styles of selling in our new in our wholesale customers as new product has arrived. We got a little bit of we had success with the sneakers. Once the weather warmed, the sandals started performing. So in general and the new fashion product, what we call transitional product, but really it's the right price points in boots and lighter weight early fall product that has been performing well. So and we're starting to see the same thing happening as we're getting early reads from our wholesale customers. So we're pretty feeling pretty good about that. Okay. That's helpful. And then I guess from a wholesale perspective, I mean in general kind of across the industry, there's been a lot of concern for both apparel and footwear brands just on the retailers taking a little bit more cautious view in the order book. I mean can you just articulate on what kind of behavior you're seeing kind of thus far for the fall holiday deliveries? And then I guess to that if there's any just update on the backlog, you did comment more orders than inventories, but just any color on both how retailers are feeling thus far this season and then also on your backlog? Thank you. Okay. I think caution is the right word. I think everyone is approaching and especially after the last two winters very cautiously. That's why it's important for us to make sure that we are in a good position to meet their near term needs when with our core product. So and we decided to take some product early. We understand that consumers out there are buying closer to their needs, closer to the season. Retailers are reacting accordingly. And we're in a good position to fill in around core styles, which is pretty essential for us, assuming of course that we get a more normalized winter. So in general, we're feeling pretty good about the inventory position we're in and the availability of core styles we're filling. And Aaron, this is Tom related to backlog. There's really no change since the past quarter because especially for the business, it's primarily the wholesale business is primarily pre booked. And but to add some color, consistent with the last quarter, the pre booking came in more skewed to the Q4 versus the Q3 because to some of those points Angel mentioned, the retailers are being more risk adverse early on. They want more product later during the specialty peak holiday selling season. Okay. And then I guess to the inventory comment as well, I mean, it's better exiting Q2. But could you just talk a little bit about the complexion of this balance between both the independents and the major wholesalers? In terms of inventory in the channel? Yes. How are you feeling about kind of the delta between the 2? I think we feel pretty comfortable there. Time has marched we're already we're comfortable with how the our larger wholesale customers, the bigger retailers, how their channels are cleaned up. And I think as time has marched on here, the independents have gotten a little bit cleaner as well, but not to the same level as the larger customers. Great. Thank you, guys, and best of luck. Thanks. And moving on now to Sam Poser with Stern AG. Thanks for taking my question. Well, I'm going to take your inventory on here. Could you tell us how much inventory was it $60,000,000 of inventory that you allowed to come in early? Because you said you would be under $300,000,000 I guess that's my first question. Yes. Good question. Let me give you some color on that. We had talked about being at about $300,000,000 We came in a little bit over $362,000,000 Obviously, a little bit of that was related to Teva and Sano, very slight amount. The rest is really mostly timing. And so you're working with maybe $55,000,000 there and $30,000,000 to $40,000,000 of that $55,000,000 is based on our decision to bring product in early, so we'll be better prepared to put the product in our warehouse and service our backlog in our DTC for the back half of the year, and I. E. Not be late on fashion product and similar to some of the things that happened last year. I think to add in terms of the quality of the inventory, we gave you some good color about we need to bring more inventory in. Our wholesale order book alone is going to take care of inventory we have at the end of June. So we need to bring more inventory in to be able to service our DTC business as well as have the opportunity to chase some business within. I mean in all due respect though, isn't that as you said, that's probably much more of a 4th quarter story than it is a 3rd quarter story. So I guess the question to you is, what is your target inventory given your current sales guidance with the gross margin and everything, what is your target inventory for the end of Q3 and your target inventory for the end of Q4 to set yourself up properly for 2014? I think how we would like to communicate on our inventory as we have seen some improvement in it, it's always had great quality and we've never had any large write off issues, is look at it more on a 12 month moving average kind of basis. And we expect to continue to have our inventory levels more in line with forward sales trends and continued improvement on a 12 month moving average basis over time. I think we're spending too much focus on the inventory at any one point in time. So I think you need to look at improving trends over time. Well, yes, but the thing is that the trend because of the business at the end in 2012 at the end of 2011 through 2012, the inventories were so bloated at that time that you're comparing it off of a higher number to start with that was too much to begin with. So the year over year comparisons don't work anymore. You got to go back to like Q3, 2011 inventories or Q2, 2011 inventories to get more of a like for like. And so the question is, where are your target inventories? I'm thinking you need to be sub-two 50 by the end of the year, period, just to be set up to get your turns right and everything else. Am I in the ballpark and so on? I think, Ned, just to frame a reference to ground everybody in the call, our UGG brand inventory is up slightly a lot lower than the implied sales growth in the back of the year, which is 10%. So again, you need inventory to be able to service growth in the back half of the year and we feel good and especially good about the quality of that inventory where we stand and feel pleased with where we're heading on the management of it as well. All right. And moving on next to Randy Konik with Jefferies. Please go ahead. Hey, how are you? Quick question. So just can you just give us a little bit more color about what the accounts are saying in terms of the it sounds like the backlog in the order book is obviously improving. What are they telling you? And are they is it because they feel better about the environment? Are they feeling better about the products? Just first question is on what specifically are these accounts kind of talking to in terms of impacting the backlog? Thanks. Well, 1st of all, from a product point of view, great response on the product. So far happy with sell through on the product. We have actually people who ordered a little light on core classic product that's starting to worry them. I think they may find themselves in a position to chase some product as the season progresses. The backlog hasn't changed. So we really feel going into this 3rd Q4 pretty confident about the reaction we've had, the response from retailers, the sell through of the product, the quality of the inventory, all those things are positives. Okay. Got it. And then in terms of just remind us where we should be at with UGGpure over the next 12 months? Yes. We said and it's been we're very happy with by the way the way in which UGGpure has evolved. But we said the real benefit of UGGpure would be felt in the more mid to longer term period. So we had, as you may recall, regular sheepskin that we had to work through in 2013 and we continue to now as we move through that inventory of raw materials appropriately replace our needs for table grade with our Purim. We're continuing down that path. Got it. And then Say again? Go ahead. No, no, go ahead. Finish your thought and then I have one last question. No. In regards to UGGpurea, we just wanted to remind people that we're also looking at expanding it into our home product and really delivering the best product possible for our consumers with as much diversification as we can. And as Angel mentioned, by the end of 2013, we're looking to deliver up to 10% of our product using exclusively UGGpure and then up to about 25% in the medium term. Got it. And then lastly, Tom, just kind of walk us through your thoughts on buyback in the business right now in terms of obviously share repurchase activity. How do we think about cash generation in this business over the next 12 months and corresponding buyback activity? Thanks. Yes. Good question. The business model starts with the margins we have and the investment strategy that generates a lot of good cash flow, good operating cash flow. So we do have that opportunity with that operating cash flow to be able to reinvest in the business. And I think there's more of a lean now to reinvest in a business versus repurchasing stock. That being said, we still have $79,000,000 available on the current authorization and we'll with that, we'll be up we'll consider opportunistic repurchases as well. We will now move to Bob Drbul with Barclays. Hi, good afternoon. I guess Tom for the my question is when you look at your assumptions in the back half of the year in terms of the sales assumptions and the margin assumptions, can you just explain what you would view as conservatism that you have built in? I understand the new stores, but like the margin recovery piece of it and just the sales piece of it, how you've estimated especially the new stores and the retail stores to get to the top line and the bottom line assumptions that you're looking for now at this point in time with the visibility that you have? We feel comfortable with where we're at on the guidance we put out there for the back half of the year. I think one thing to consider, as we grow our DTC business, we have been seeing improving trends. On the e commerce business, there's some strong trends there and we get more and more sort of intelligent and experienced on how to drive more and more business into our e commerce through our website. So there might be an opportunity there. On the retail stores, I mean, we've in our guidance, we assume we're going to open 6 more, so I. E. 36 versus the earlier guidance of 30. Obviously, as we grow retail around the world, there's always sort of a pool of additional stores, I. E. Locations and whatnot we're looking at. So you have to work with a larger inventory to be able to secure the 6 additional. So there may be some opportunity there, but can't necessarily promise that at this point in time. And we feel good where we're at from a margin point of view and especially the DTC business where how we can drive additional profit dollars with more DTC money. So if there's we end up having more DTC business versus wholesale business in the back half of the year, obviously, that can drive a lot of profit opportunity. Okay. And then on the sort of retail business in Japan and in China, I think Japan with the 20% in the China sequentially improved and still negative. Can you just elaborate a little bit more on both of those markets and sort of the game plan especially in China going forward? Japan, really pleased with that. Like for the quarter, I mean every store comped positively. If you go over to that market and just see the energy in the market, you could just see how our product is really the changes we've made to the product offering there and how we're driving traffic to the stores, you get pretty excited. And some of the new stores were opened in some of the locations at very high traffic locations with the right demographics. So very excited about Japan. In China, it's getting the better inventory field, broader product assortment, some product learning, some more marketing around awareness of the brand and driving traffic to the stores in China is what makes us excited about that opportunity which helped drive the improvement there. Great. Linda, congratulations. Good luck. Thank you so much. And moving on, we'll now go to Tepos Bari with Goldman Sachs. Hey, good afternoon. I wanted to ask a question about UGG wholesale in the second quarter. My math gets me to UGG wholesale being down about 20% in the quarter. Is that right? And if so, it looks like you're modeling a more stable growth rate year over year in the back half just kind of backing into the numbers. So A, just curious to know what drove that decline in the Q2, I guess to start? Yes. I mean, from a modeling point of view in the Q2, you're pretty close to where we ended up in the Q2 for UGG. It was a combination of not only the domestic business, but some of the international business as well. And going forward, we still have that's pre booked. So in the back half, we have cautious expectations as well for our wholesale business in the back half. Okay. And I guess on that point, I think historically your business has been largely pre booked for the fallwinter business. Does the composition I know that retailers are buying or buying closer to need and receiving closer to need, but does the composition for the entire season change of pre book versus that once this year versus last? Not really other than 2 tough winters where we have a fair amount of cancellations, we still maintain some cautiousness around cancellations and very little reorders in our projections. Okay. Yes, that was my other question for reorders. Are you assuming kind of flat reorders, reorders to be up, down? If you can give us any kind of context there? Virtually none. Virtually none. Hopefully, it's better than that, right? Last one for you, Tom. Last one for you is that square footage, I think you've been providing that for the past couple of quarters, square footage in the last 12 months, sales per square foot. Are you no longer providing that or? I think we did. We provided the square footage in there. It was sales per square foot on an annualized basis on a for the comp basis around $1500 and total square footage is well over 200,000 square feet now. Okay. Thanks a lot. Good luck. Okay. All right. Thanks. And we'll now go to Omar Saad with ISI Group. Please go ahead. Thanks guys. Can you so you guys have guided to the Q2 kind of top line last quarter around flat. And I know this is the smallest quarter, but came in a little bit below that, but you raised the revenue guidance for the full year. Can you just help me understand what are the areas of the business that give you the confidence despite a little bit softer 2Q top line? And maybe you had anticipated that you kind of felt like it was appropriate to bring up the full year? Are there certain things going on with some of the brands, certain categories, is it the DTC side of it? It sounds like the Internet business is strengthening. Any insight there would be helpful. And then I have one follow-up. Yes. It's the DTC business. We feel more and more comfortable with that. We have that improved e commerce trends and we're going to open in the guidance as soon as we open 6 more stores than we did before. So that gives us the comfort level on the revenues. I think that ripples through and gives you more margin dollars to work with as well. And there's some additional OpEx to offset that, but that gets you to a revised guidance that gets our earnings growth in line with our sales growth as well. So that's why we that's the driver of the improved guidance. Understood. Thanks. And then on Health, could you talk about a little bit as you're getting a little more opportunity to work with the UGGpure material and integrated into some of your products and thinking about it going forward. Can you talk about the design teams and the designers in the company? Some interesting ideas about being able to do more with the product from a design standpoint with those materials from a design standpoint. Are we going to see have an opportunity to see come to some new styles with the UGGpure this fall and rolling out next year? Just any update on that front would be really helpful. Yes. You're going to see I think probably the operative word for the design team when it comes to UGGpure is liberating, because really what it does is allows for even color. For example, there are limitations in what you can do in color with conventional sheepskin because of certain colors that doesn't take well, they're too caustic on the skin side of the high. Unpure allows us a lot more diversity in color, which is really important from a texture point of view. We have the opportunity to engineer different textures into the material, which we never had that opportunity before. Overall, sort of the pile itself, in other words, the density of the material, we can vary that. So it allows us to make product that is less bulky and as a result allows us to have more form fitting footwear, which one of the things we found out from consumers who were objecting, they were interested in the brand, they love the slippers, but they were objecting to the shoes as outdoor fashion because the product was too bulky. And now this allows us to have much more closer to the foot shapes and feel for the product. So those are all things that are liberating to the design team. And you'll see over the next several quarters tremendous innovation when it comes to the product design. I think fall 14 is something I've already previewed. So now that's just very exciting product. I've never seen anything like that from our brand. And that's only possible because of what UGGpure has allowed the designers to now think about and go execute. Understood. And will some of that be at the fall shows this year or the preview lines? Yes. You'll see fall 2014. You'll see that in the preview lines and we'll have our at the beginning show, we'll have a product preview at the showroom. Great. Thanks guys. Thank you. Thank you. Moving on now to Karina Friedman with Wedbush Securities. Hi there. Just a quick question on you mentioned slippers are now a year round category. Are there any opportunities to pick up pricing there or to expand that line any further? Yes. We have this year introduced an $80 price point in slippers. Again, because some advantages we have with our pure. It allowed us to actually make a slipper that for warmer climates is not quite as bulky. It's been very successful, very popular. Our continued success of our men's Ascot continues to develop around the world. We're building a slipper business in markets outside the U. S. Where really in the U. K, for example, they had not really seen a slipper business. So we're pioneering an entire category of footwear in the U. K. So yes, you're K. So yes, you're going to see a lot more diversity again of color, of style, of the density of the material to allow us to evolve that business. We're the market leader by a long stretch there. Okay. And then my second question is, have you changed your philosophy about expanding distribution any for this year given your inventory? And just maybe there was some weakness I think in the higher end department stores and would you consider opening up some mid tier department stores? Or just if you have any updated thinking about that? We're very comfortable with our wholesale distribution. We have been cleaning up our distribution here and there in various parts of the country where we felt in some cases where we're not being well represented. That's an ongoing process. We have evolved to a very sophisticated direct to consumer model with our outlet stores and concept stores in the mix. And that certainly negates the need to run out and open less than desirable distribution in our mind. We have excellent wholesale partners across all channels and we don't see a need to go beyond that in the near term. Okay, great. Thank you. Good luck. Thank you. Thank you. Moving on now to Mitch Kummetz with Robert Baird. Yes. Thank you. Yes, I want to begin I just want to go through some of the assumptions. There are some assumptions that were discussed on your Q1 earnings call. I just want to be clear that we're still looking at kind of the same assumption. So on your own stores, I think it was mentioned last call you're looking for a flat comp. And I just want to be clear that that's still the case in the back half? Or do you now expect it to be better than that given some of the trends that you're seeing at retail or within your own stores? Yes, Mitch. This is Tom. Yes, we talked about it the last call. I think we talked about a flat to slightly up comp for the total year. And for the total year, that's similar to what we're looking at now, flat to low single digits kind of comp for the total year. Okay. That's helpful. And then I think you'd also said last time that you thought that UGG wholesale would be down sort of mid to high single digits for the year kind of based on the way your order book was shaping up and kind of your assumptions on cancellations and reorders. Is that still the case then as well? Yes. It's more for the totally well, we get sort of the first half of the year is behind us. Looking north of the back half right now, which is probably what you're more focused on. When you look at our guidance for the back half of the year, the UGG domestic wholesale business is down more like a mid down mid single digits kind of. Okay. And then I know, Tom, you said that you're not assuming any material or on the reorder side, any really any material improvement there or actually I think you said you're really not looking for any reorders. I think last call you said that you're expecting a similar level of cancellations as well as last year. Is that still the case then? Yes. From the cancellation side that still is the case. Okay. And then real quick on Pure. I'm just trying to still get a better handle as to what the cost benefit is on that. And let me ask the question this way. So if you look at like a footbed or a lining and you compare Pure to like table grade sheepskin, I mean how much of a cost differential is there going from like table grade sheepskin on a footbed or aligning to pure in those components? Is there any way you can give us give me a sense of that? Yes. This is Anja. First of all, yes, it's significantly better from a cost point of view. We haven't been specific into how much per square foot, etcetera. But more important than that, it's better product. The UGGpure footbed doesn't compress, it doesn't sort of develop bare spots. It's just more durable. And that's from our experience. And we'll continue to evolve that technology, continue to develop the testing procedures as we continue to evolve the product. But from our review so far, it's just better product. And the consumer will vote accordingly, but I think they'll be pleasantly surprised. Okay. All right. Thanks. Good luck. Moving on now to Scott Krawcheck with BB and T. Yes. Hey, everyone. Thanks. Given the new store openings abroad and the momentum in Japan, can you just update us, Tom, sort of the size of the markets ranking behind the U. K? Is Benelux still the number 2 market? How do they compare to China and Japan there? Yes. Let me cut that handy. For the total year, let me give you a frame of I'll give you last year's reference. The U. K. Was our biggest international market and then the then Japan actually was number 2, Betelux number 3 in China number 4. This year, the U. K. Is still the largest market. Then Japan comes in number 2, China 3 and Benelux number 4. Okay. That's awesome. And then are the issues affecting China and Benelux similar? And are the solutions similar? Or how do you frame the issues there? Different things. Benelux, it's really a wholesale business. A lot of macro issues there to the point that they're down the consumers when they do buy any brand's product, they down select to the most affordable. So that's putting ASP pressure. Still some distribution issues there similar we had in the U. K. Before we changed that around. So we need to work on that. China, that's a retail market. We opened a lot of stores. We're good at opening stores. We now are adding the infrastructure and the personnel and the executive experience to be able to operate stores at a better rate and work on comps and make sure we have inventory and make sure we merchandise the stores correctly and those kinds of things. So that's why we're starting to see some improvements on the China comps. Okay. Tom, that's really helpful. And then just last, on how when we were in Nordstrom's, the Nordstrom's last weekend, the store associates kept saying, it's a no brainer for the Roni at $89.90 or the Alloway. I mean, where are you in terms of introducing product at that price point? And will we see even more next year? Yes. You'll definitely see more. Really this is going to become a power alley for the brand. That's one of the things that we're very excited about. And again, given the flexibility that we have with raw materials, it allows us to address price points that we had to abandon because of the rise in sheepskin pricing over the last 5 years or so. So we're very excited about not only the price points, but really the fashion, the quality, everything that we're seeing in the fall 14 line. I'm very excited to show you all what that looks like. It's going to be a breakthrough and you'll see for yourselves. And then I also just wanted to add with Nordstrom that we're really pleased with the results we're seeing in the offering, which is more transitional, more fashion product, which is buy now, wear now. And consumers are really responding to getting more of that transitional product. Yes, we definitely saw that. Thanks guys and good luck. Thank you. Moving on now to Camilo Lyon with Canaccord Genuity. Thanks guys. I just wanted to go back to the inventory issue for one minute. Could you just help me understand where does the confidence level come from to take on more inventory and hold that at Union or DC if the retailers aren't necessarily committing to taking that product earlier? I mean, I know you guys are nice guys, but that seems to not jive totally with what we're hearing from retailers and how they're trying to position their business? So just to confirm what we talked about earlier Camilo, we actually have more orders than we have current inventory levels right now. So we need more inventory to service the current orders. So that's obviously a good position to be in from that point of view. And I think another thing to give everybody just remind everybody the frame of reference in terms of how the company is transforming into more DTC business versus wholesale and transforming into more DTC business versus wholesale and distributor kind of business. You need inventory to support the DTC business, obviously, both the e commerce and the retail stores. And you need more drops of inventory over the course of the year and during the season to have more and more fresher products. So as a result of that, you need to have more inventory. And one other point, I don't want to I can't say it really enough. We don't have with the strength of the brand, we don't have any issues from a major inventory write off that maybe some other brands would have. And another thing to point out, I mean, we did have some closeouts like any other footwear brand in the Q1, but nothing really of any significance. In fact, by the time it gets ready to finalize our closeouts for the quarter, sometimes we wish we could find more product to close out. So we and we've got a brand new back to the strength of the brand, been around for 35 years. So that's an experience in terms of how to manage inventories as well. Okay. And so the incremental $30,000,000 to $40,000,000 of inventory that you talked about, if the UGG inventory is only up decimal points, Is that inventory then fashion related product? It's a combination of both the transitional product for the 3rd quarter as well as some additional what we call heritage kind of product as well as other casuals. And it's a broad spectrum of a lot of different lots of different product. We'd rather get our hands on that inventory to be able to have it in our warehouse, because we have moved a lot of inventory through our warehouse during the peak selling season. We don't have to sit there and worry about waiting for inventory to be on the water. And this also enables the supply chain, especially our factories that have more capacity to be able to manufacture even more product to meet the current order book we have, because again, we right now our order book is higher than the current inventory we have on hand. If you had more inventory then it would one would be led to believe that your revenue guidance will be higher. Is that correct? Well, I think let's look at this. I mean, currently our UGG inventory at the end of June is up 2.5%, 3%, mid single digits. Our implied guidance for the back half of the year of UGG sales growth is up double digits, a 10% kind of number. So we're going to need more inventory to that kind of growth. And we'll also have inventory available in the key styles to chase some business in season. And then just lastly on that. So do we expect the Q3 inventory to be lower by $30,000,000 to $40,000,000 or will it be higher than $30,000,000 to $40,000,000 of that increment that you took on sooner? I think how we want to get everybody to view our inventory is continued improvement over time, which we've demonstrated on a year over year basis and the inventory is more in line with forward sales guidance and the quality will continue to be very strong. And our final question today will come from Howard Jubin of RBC Capital Markets. Hey, guys. Thanks. Just maybe one question on average pricing. Maybe given all the initiatives you're working on in Umpqua, what's going to be average of price going to look like or maybe pricing on the collection this fall versus last fall and maybe 2014 versus 2013 is going to be trickling down over time? I think as we continue to develop transitional product, the transitional product is at a lower average selling price. That said, as I mentioned in my comments, we're moving more units. So we're putting more people in the brand, which is a very positive thing. When it comes to the high selling season, the core assortments, that remains at the traditional price points. And then as we have experienced over the last few years, we've been able to mitigate taking the radical price increase. So we expect stability there in the core assortment. So really you sort of have to look at our business as from 2 perspectives. 1 is what's happening with price points in the peak season of core product selling, those price points will remain where they've been. And then we're introducing new product, new consumers into the brand and lower average selling price. So if you take the net net of it all, we probably over time will see as our business in the second and third quarter grows with transitional product, you're going to see the average selling price come down a little bit and then bounce back up in the Q4 with the core assortment. Got it. Okay. Thanks. Thank you all very much for participating in the call. We look forward to updating you in 90 days as we move toward a successful conclusion of 2013.