Earnings Call: Q4 2010

Feb 24, 2011

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Deckers Outdoor Corporation 4th Quarter and Fiscal 2010 Year End Earnings Conference Call. At this time, all participants are in a listen only mode. Following the presentation, we will conduct a question and answer session. Instructions will be provided at that time for you to queue for questions. I would like to remind everyone that this conference call is being recorded. Before we begin, I would also like to remind everyone of the company's Safe Harbor policy. Please note that certain statements made on this call regarding our expectations, beliefs and views about our future financial performance are forward looking statements within the meaning of the federal securities laws. These forward looking statements are intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. These statements relate to the company's anticipated revenues, expenses, earnings, gross margin and capital expenditures and the outlook for the company's markets and the demand for its products. The forward looking statements made on this call regarding our future financial performance are based on currently available information And because our business is subject to a number of risks and uncertainties, some of which may be beyond our control, actual operating results in the future may differ materially from the future financial performance expected at the current time. Deckers has explained some of these risks and uncertainties in its earnings press release and in its SEC filings, including the Risk Factors section of its Annual Report 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 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, Chairman and Chief Executive Officer, Ohel Martinez. Please go ahead, sir. Well, thank you everyone for joining us today. With me on the call are Chief Operating Officer, Zohar Ziv and Chief Financial Officer, Tom George. As you saw from our earnings press release issued earlier today, our Q4 performance was much better than expected. And as a result, the company surpassed $1,000,000,000 in annual sales for the first time in its history. We have a lot to go over on today's call. So I'll begin with a brief review of our recent performance. Tom will then take you through our financial results and the outlook for the Q1 and full year of 2011. Then I'll return to provide details on the strategies that form the foundation of our near and long term growth targets. Our record Q4 results were driven primarily by strong global demand for the UGG brand. We experienced very healthy sell through in all our retail stores, particularly during November December, while our e commerce segment reported its best sales quarter in company history. Our wholesale and distributor businesses also performed very well in Q4. The majority of our wholesale accounts and international distributors carried a much larger more diverse assortment of products this year, including styles from our cold weather, fashion, knits, sport, casual and slipper collections. Looking at the full year, our performance was indicative of the progress we've made diversifying our business in terms of product channels and geographies. While we still have work ahead of us, I'm extremely pleased by our ability to successfully develop compelling new footwear collections across our brand portfolio, profitably expand our company owned retail footprint and further penetrate the international markets. Some of the many record highlights from fiscal 2010 are worth noting. Sales for all brands of $1,000,000,000 an increase of 23% over last year. UGG brand sales of $873,000,000 a 23% increase from 2,009 Teva brand sales of $101,000,000 up 30% versus last year international sales of $237,000,000 a 42% increase over 2,009 and retail sales of $126,000,000 an increase of 59%, driven by an increase in comparable store sales of 17% and 9 new stores. Tom will now go over the financial highlights, which also include record gross margin and earnings results. Tom? Thanks, Sanghill. In the Q4 of 2010, net sales increased 23.6 percent to 4 $130,100,000 versus $348,000,000 in the Q4 of last year. Net sales of UGG brand products increased 23.8 percent to $412,800,000 versus $333,300,000 in the Q4 last year. Net sales of Teva brand products increased 26.2 percent to 13.3 $1,000,000 in the Q4 compared to $10,500,000 in the same period of 2,009. Combined net sales of the company's other brands were $4,100,000 in the Q4 of 2010 compared to $4,200,000 a year ago. Included in these numbers were global retail store sales of $72,400,000 up 55.4 percent from $46,600,000 in the Q4 of 2019 driven by 9 new stores and a same store sales increase of 11.6% for those stores that were opened for the full 3 month periods ending December 31, 2009, 2010. Sales for our e commerce business which are included in the brand sales numbers as well increased 29.8 percent to $59,500,000 in the 4th quarter, up from $45,900,000 in the prior year. Also included in the brand's sales numbers, domestic sales for all brands increased 22.2 percent to $377,100,000 compared to $308,600,000 in the Q4 of last year and international sales increased 34.6% to $53,000,000 compared to $39,300,000 in the Q4 of 2009. International sales were 12.3% of total sales for the Q4, up from 11.3% in the same period last year. Our gross margin for the Q4 improved 440 basis points to 54.2% compared to 49.8% last year. This increase was primarily attributable to higher sales from our retail and e commerce businesses both of which carry higher gross margin as well as increased UGG wholesale margins. Total SG and A expense for the quarter was $92,600,000 or 21.5 percent of net sales compared to $67,800,000 or 19.5 percent of net sales a year ago. SG and A increased primarily due to cost to support our growth. There were 9 new retail stores that weren't open during the Q4 last year, international distribution start up expenses, increased intellectual property and legal expenses and additional increases in variable expenses for the increased sales. Operating income for the quarter was $140,700,000 or 32.7 percent of sales compared to operating income of $105,600,000 or 30.4 percent of sales last year. The improved operating income was attributable to the aforementioned increases in sales and gross margins. Net income for the Q4 of 2010 increased 31.7 percent to $89,200,000 compared to net income of $67,700,000 in the Q4 of 2,009 and diluted earnings per share increased 30.5 percent to $2.27 versus diluted earnings per share of $1.74 in the Q4 of last year. Please note that all share and diluted earnings per share amounts discussed in this call including the amounts for prior periods take into account the 3 for 1 stock split in the form of a stock dividend that was distributed in July 2010. For the full year, net sales increased 23.1 percent to $1,000,000,000 versus 813,200,000 in 2,009. Our net sales of UGG products increased 22.7 percent to $873,100,000 versus $711,800,000 last year. 2010 marked the 13th straight year of double digit sales increases for the UGG brand. Net sales of Teva products increased 30.5% to a record $101,300,000 for the 2010 fiscal year compared to $77,700,000 in 2,009. Combined net sales of the company's other brands increased 11.9% to $26,500,000 in 20.10 compared to $23,700,000 a year ago. Included in the above 2010 year end numbers are global retail sales for all brands of $125,600,000 up 59.1 percent from $79,000,000 in 2,009 again driven by the 9 new stores and a same store sales increase of 16.6% for stores that were open for full 12 months in 2,009 2010. Sales for our e commerce business which are included in the brand sales numbers as well increased 21.3% to $91,800,000 for the 2010 fiscal year compared to $75,700,000 in the 2,009 fiscal year. Also included in the brand sales numbers, domestic sales for all brands increased 18.3 percent to $764,100,000 for the 2010 fiscal year compared to $646,000,000 in 2,009 and international sales increased 41.7 percent to $236,900,000 for the 2010 fiscal year compared to $167,200,000 in 2,009. International sales were 23.7 percent of total 2010 sales compared to 20.6% in 2,009. Our gross margin for the year increased 460 basis points to 50.2% compared to 45.6% in 2,009. This increase was primarily attributable to the higher percentage of retail and e commerce sales in 2010 versus 2,009 and increased wholesale margins in all wholesale segments. In addition, we received approximately $7,000,000 in duty refunds during 2010 which we do not expect to recur at this level. Total SG and A expense for the year was $253,900,000 or 25.4 percent of net sales compared to $188,800,000 or 23.2 percent of net sales a year ago. The increase in SG and A was primarily a result of a planned increase in international expenses in support of our continued growth globally including initial distributor conversion expenses and international retail expenses, UGG divisional expenses as well as domestic retail expenses. Operating income was $249,100,000 or 24.9 percent of sales compared to $181,200,000 or 22.3 percent of sales last year. Interest income was $200,000 in 20.10 compared to last year's interest income of around $1,000,000 This decrease was primarily a result of lower market interest rates versus the same period a year ago in addition to our decision to continue to invest in safer more liquid and lower yielding cash investments, short term investments in government securities. Our effective income tax rate for 2010 was 35.9%, slightly down from 36.2 percent in 2009. Our 2010 tax rate was lower than initially expected primarily due to a higher mix of our international business. For 2010, net income increased 35.5 percent to $158,200,000 or $4.03 per diluted share compared to net income of $116,800,000 or $2.96 per diluted share in the same period last year. Turning to the balance sheet. At December 31, 2010, our overall inventories increased 46.4 percent to 125,000,000 dollars versus $85,400,000 a year ago. By division, UGG inventory rose 35.4 percent to $94,700,000 Teva inventory increased 144 percent to $22,700,000 and our other brands inventory increased by $1,500,000 to $7,600,000 at December 31, 2010. We continue to control inventory as the increase in UGG and Teva inventories was primarily attributable to a larger spring 2011 assortment for the UGG brand, the growth in spring orders for both brands, the warehousing of spring 2011 inventory supporting the new wholesale European business that was previously fulfilled by international distributors and 9 additional retail stores compared to a year ago. In addition, at December 31, 2010, we had cash and cash equivalents totaling $145,200,000 up 30.2 percent compared to cash, cash equivalents and short term investments of $342,000,000 at December 31, 2000 and at December 31, 2000 and 9. Accounts receivable at December 31, 2010 were $116,700,000 compared to $76,400,000 at December 31,009 with the increase being attributable to increased sales, a higher content of international sales, which carry longer terms, lower reserves for bad debts and a higher content of sales occurring later in the Q4 compared to 2,009. During the quarter, we did not repurchase any shares under our current share repurchase program. We have approximately $20,000,000 remaining authorized under the program. Now moving to our outlook. Based on current visibility, we expect 2011 revenues to increase approximately 20% over 20.10 levels. For the full year, we expect UGG brand sales to increase by approximately 19%, Teva brand sales to increase in the low 20s and our other brands combined to increase close to 20%. We currently expect diluted earnings per share to increase approximately 10% over 2010. However, included in our earnings projections are certain expenses related to our transition to a wholesale model in the U. K. And Benelux as well as additional investments in several key areas of the business that we feel are important to the long term development and growth of the company. Without these investments earnings per share growth is 21% exceeding our sales growth guidance. The investments include approximately $8,000,000 of one time costs related to our transition to a wholesale model in the U. K. And Benelux, approximately $11,000,000 of additional marketing and advertising spend to support the UGG brand's men's and women's prospect initiatives and a $10,000,000 increase in our legal budget to further fund the protection of our intellectual property and trademarks. Our forecast is based on a full year gross profit margin of approximately 51% and SG and A as a percentage of sales of approximately 29%. Our effective tax rate is expected to decline to approximately 33% in 2011 driven by the increased mix of international sales. Regard to gross margin, we are now anticipating product cost to increase approximately 10% in 2011 over 2010 with a greater percentage of the increase coming in the back half of the year. These increases are primarily a result of higher raw material costs, primarily sheepskin, which have continued to increase over the past 12 months and to a lesser extent labor and freight. Importantly, we are well positioned to mitigate these cost pressures to the transition to direct subsidiaries in Europe, the expansion of our company owned retail operations and price increases on selected styles. Our capital expenditures in 2011 are expected to total approximately $55,000,000 to $60,000,000 up for our 2010 level of $23,000,000 driven mainly by the build out of 15 new retail stores and corporate facilities. We are retaining financial flexibility with a potential sale and leaseback scenario on our new corporate headquarters. For the Q1 of 2011, we currently expect revenues to increase approximately 29% and diluted earnings per share to decrease approximately 5% compared to the Q1 of 2010. First quarter guidance includes approximately $7,000,000 of one time expenses related to our international transition, approximately $2,000,000 of increased legal spend and about $2,500,000 of increased marketing budget. Without these investments, diluted earnings per share growth would be approximately 36%. As a reminder, a significant amount of our operating expenses are fixed and spread evenly on an absolute dollar basis throughout each quarter. This includes the costs associated with the 9 new stores that were not open until the second half of twenty ten. Therefore, due to the aforementioned increases in SG and A, we expect our earnings to decline in the first half of twenty eleven as compared to the first half of twenty ten, which are typically our lowest volume sales quarters and earnings to increase in the back half of the year. In addition, our shift from distributor to direct wholesale operations in the U. K. And Benelux results in a significant impact to our Q2 as UGG, U. K. And Benelux sales previously recognized in the Q2 as sales to distributors will in 2011 be recorded as wholesale sales during the 3rd and 4th quarters. I'll now turn it the call back over to Angel. Thanks, Tom. As you just heard, we're expecting sales to increase approximately 20% in 2011. Let me walk you now through the key growth strategies to drive those sales. First, we are introducing several new products and collections that we believe will create new consumer demand. For the UGG brand, the Spring line includes a more complete offering of boots, slippers, sneakers and sandals, both casual and fashion. Based on the sell through performance from last spring, we've added significantly more shelf space with our wholesale customers, so shoppers will find a much broader selection of product at retail this season. The early reads on several new styles have us encouraged about the full potential of our spring business as the weather improves and temperatures begin to warm up. Later in the year, we'll be rolling out a much expanded men's collection, which will include more rugged boots, sneakers and casuals. This launch will be accompanied by new marketing programs that I'll discuss in more detail during this call. On the women's side, we're expanding several of our best performing collections from 2010, such as the Equestrian collection, fashion wedge boots, sneakers, wood bottom clogs, boots and booties. Following up on the successful performance of our limited edition Jimmy Choo line, we're introducing our first ever Italian made collection this fall. As you would expect, these products will carry higher price points starting around $500 to $1200 and will target the most discerning of consumers. The early reaction from accounts including several new luxury retailers has been very favorable. We introduced our 1st in house handbag line for fall 2011 and the reaction has been very good. Our cold weather accessories business, which is licensed, continues to build each year and is very successful at retail in many of our key footwear accounts. The accessories really round out our shop in shop presentations as well. And around the world, we have over 250 shop in shops, including a new 1,000 square foot space in Selfridges and our shop in shop in Harrah's with a plan to expand to almost 400 shop in shops by year end. After being up more than 30% in 2010, the Teva brand begins 2011 with a good deal of positive momentum. Despite the tough year over year comparisons we face, we feel very good about the brand's prospects based on the product planned. This spring, we're continuing to focus on capturing an important share of the much larger closed toe segment of the outdoor footwear market. We have sought to strengthen the Teva brand's leadership position in the upper end of the market with technical product and leverage the brand's authenticity to drive volume in the mid tier market with compelling casual styles. We believe that our strategy is working. As an example, we have a high performance technical water shoe, the Narcosi, retailing for $100 which by the way looks great with jeans, accompanied by an incredibly lightweight collection of closed toe mush products, which we call flyweights that include both lace up and slip on styles for men and women at $40 This upcoming fall, we're launching our initial foray into Freestyle mountain biking followed by Teva's first ever insulated winter footwear featuring event waterproof membrane, Thinsulate insulation and our new IceGrip rubber technology. We believe our new product introductions will have broad appeal that is consistent with our strategy and they are being designed and positioned to target younger more active consumers. Another key component to our growth strategy is the international expansion. We expect to realize approximately $50,000,000 of incremental sales in 2011 from the conversion to a wholesale distribution model for the UGG, Teva and Simple Brands in the UK and the UGG and Simple Brands in Benelux. On top of this, we expect to grow these businesses by working directly with retailers to drive higher productivity through broader product assortments and more effective marketing programs, including in store merchandising, traditional advertising campaigns and public relations efforts. In Japan, where we're beginning our 3rd year under a wholesale model for the UGG brand, we believe that similar strategies are being executed with good success, giving us a heightened degree of optimism about our long term prospects in the key luxury goods market. At the same time, the establishment of a direct subsidiary in Benelux provided a significant boost to the Teva business in 2010. We expect similar opportunities for the brand in the UK and Ireland in 2011. Like our international business, direct to consumer is becoming a more significant contributor to sales and profits. We expect this trend to continue as we plan to expand our retail store base more than 50% with approximately 15 new full price stores opening in 2011, the majority of which we expect to open in China through our joint venture along with a handful planned for Japan, Europe, Canada and the U. S. The 9 stores we opened this past year performed very well to date as have our comp stores evidenced by same store sales growth of 17% in 2010. We believe the potential exists to have roughly 150 stores by 2015. Not to be overlooked is the recent performance of our e commerce business. E commerce delivered a standout 4th quarter, driven by demand for the Sparkles boot, which was sold exclusively at uggaustralia.com and UGG concept stores after being featured on the final Oprah's Favorite Things holiday episode. We're currently pursuing other ways to drive traffic to our website, including our new online lookbooks targeting our prospect consumer. Finally, we're putting greater emphasis on marketing. We've had notable success over the past decade generating excitement and awareness on a modest advertising budget, including traditional print and co op advertising with our customers. Through our PR efforts, we've received a lot of editorial from fashion magazines and through product seating and events, our product has been photographed many times on many celebrities, actors, musicians and TV and film personalities. As we've evolved beyond our product driven roots, we've made the strategic decision to double our brand spend to support a global lifestyle image targeting men, women and kids. The additional expenditures will be divided among a number of programs, including our recently announced partnership with Tom Brady to promote the UGG men's business, a new campaign featuring Tom Brady that will debut in conjunction with the launch of our expanded men's collections later in the year, additional shop in shops and lookbooks sent in home and featured online targeting of our prospect consumers. Below the revenue line, we're working just as hard to mitigate the impact on earnings from cost pressures flowing through our supply chain, including the following. First, Deckers has locked in our pricing and supply for sheepskin in 2011. So the recent flooding in Queensland will not directly impact the business this year. We will continue to make our UGG Australia product with the highest quality sheepskin, leathers and suedes. And second, we'll continue to evaluate risk management techniques designed to minimize price volatility and help secure access to high quality sheepskin through purchasing contracts and pricing arrangements. In addition, we're continually adding new collections of footwear. In 2010, we added the sport category including the Avira and Ryland, which have been very successful at retail. Our sport fashion and cold weather categories were our fastest growing categories in 2010. While the UGG brand grew 23% in 2010, we controlled our growth in premium twin face product. We continue to successfully diversify our product line, which includes our traditional sheepskin boots, slippers, fashion boots, casual boots, cold weather boots, casual clogs, etcetera. Furthermore, Deckers is investing in innovation, researching and developing new footwear materials and manufacturing technologies and processes that we expect to benefit all current and future brands in the form of lower unit costs, while at the same time providing better performance, insulation, comfort and fit. In addition, we continue investments in global sourcing and product design and development including product lifecycle management or PLM. To conclude, we began 2011 with a great deal of positive momentum throughout our business, which is reflected not only in our top line guidance for the year, but in our recently introduced long term organic sales target of $2,000,000,000 in 2015, which includes $1,650,000,000 for the UGG brand, dollars 200,000,000 for the Teva brand and $150,000,000 for our other brands. While the additional investment plan for 2011 will impact our near term profitability, including the international revenue share from Q2 to Q3, we are confident that we will benefit from the implementation of our brand building and growth strategies, improved operating expense leverage and greater earnings power in the years ahead. We have a great team in place, having recently added some very talented professionals to what was already a deep bench here at Deckers. I'm extremely proud of our entire organization and what we've accomplished to date. And I want to thank all of them around the world for their hard work and dedication. I know there's a great deal of excitement about achieving $1,000,000,000 in annual sales, but I believe that there's even more energy and enthusiasm for doubling this business over the next 5 years. Operator, we're now ready to take questions. Thank you. The question and And our first question comes from Jeff Kleinfelter with Piper Jaffray. Yes, thank you. Congratulations everyone. A fantastic finish to the year. Just a couple of quick questions for you. One on the growth outlook for next year. I guess, first, Q1, just curious on the UGG product with such a strong seasonal demand this year, seemingly very strong performance of UGG in the Q4, is there any carry forward of that? How would you characterize this Q4 to Q1 transition for the UGG product? Is this when you've run very tight in inventory, you end up having demand that spills over into Q1 in addition to all of your new spring product? Is that the case this year? Secondly, would just be on retail growth for 2010. I apologize if I missed it, but have you given us any thoughts on number of new stores? And what contribution retail will have to that 20% growth outlook? And then just to clarify on the $50,000,000 of incremental sales out of wholesale, is that what you're suggesting is the incremental year over year sort of organic growth you're expecting out of that market? Thank you. All right. Well, let me my memory is back to the first question. The UGG business for spring is primarily new spring product. I mean there's very little of it that is 4th quarter rolling into Q1. We've had great response. Now we just need some warm weather and everybody to sort of dig out of the snow. We expect great reception to the new product and there's a lot of enthusiasm we're seeing already. 2nd question was Jeff, this is Tom. Related to the retail stores, for 2011, we expect to open approximately 15 stores. They'll be typically similar to prior years. It'd be more in the back half of the year. And they obviously with that, they'll obviously contribute a lot to the to some of the sales growth. But so our practice has been really just to give you at the end of the year the total growth by channels and brands and not on a quarterly basis. And that one more question, Jeff related to the $50,000,000 The $50,000,000 is not the total organic growth. That is really just the lift related to flipping the switch to a direct model versus a distributor model. There in addition to that, there is also some organic growth as well. So thank you. That's my question is what sort of organic growth are you expecting out of Europe for next year? It's 2 fold related to that. It's related in the U. K. And the Benelux. The Benelux has been a really strong market. We've had a lot of penetration there. We still expect some growth there. On the U. K. Side, that is obviously a big market and we're going to have some good growth there as well. I'll add to that, Jeff. The business in the UK particularly has been as it was here quite a few years ago, very classic driven. And so the penetration of the new styles, we're really beginning that process, really beginning to get spread and assortment beyond the classic product. So that will yield, I think, a very strong growth path for the brand. Okay, great. Thank you very much. Congratulations, guys. Good luck. And we'll go next to Jim Duffy with Stifel Nicolaus. Thanks for taking my question. I guess a follow-up to Jeff's question just looking to components of growth. Implied in the guidance, what are the expectations for U. S. Growth? Yes. That Jim, good question. Again, we normally give the growth by the channels in the various brands on an annual basis, but we don't really give you growth of the retail and the international. But given the going direct in the U. K. And the Benelux with UGG and given already the large amount of domestic base that we have, we do expect international to grow at a faster rate than the domestic. Understood. Okay, that's a fair answer. A question related to the e commerce business. Can you help us understand where you are in terms of rolling out the ecommerce business on an international basis? And maybe in the Q4, those numbers were so strong. How much of that was incremental from additional exposure with ecommerce business in international markets? Hi, Jim. This is Zohar. I'll take that one. All the growth for e commerce in 2010 was mainly domestic. We are rolling as we are taking over, I mean, there was very small amount in Europe. But as we are taking over the distribution in the UK and the Benelux, we converted their business, the e commerce this year. So you will start seeing us selling in the UK and Benelux this year. And so you'll see some uplift from there. And going forward the next few years, you'll see us in Japan and China and continue in other countries. Okay, great. That sounds like a promising opportunity. The final question, the $10,000,000 incremental on legal expenses, I'm just trying to get my arms around how you guys think about the justification for that? Is there kind of a return on investment thought process that goes into the allocation of those funds? Well, I think as the brand performs and becomes powerful around the world, we constantly get challenges to our intellectual property, people attempting to counterfeit our product, people misrepresenting the brand and its ownership on websites and on and on. So this is unfortunately a cost of doing business today when you have a brand as successful as the UGG brand. And we really certainly cannot simply sit back and acquiesce to that reality. It damages our future potential and it hurts our current retailers. So we're very committed to defending our IP worldwide. Okay. That makes a lot of sense. Thanks very much and best of luck. Thank you. And our next question comes from Sam Posner with Stern AG. Good afternoon, everybody. I've got a a ton of questions. One of the things, can you just tell us what the operating margins were on the retail business for the quarter as well as by wholesale brand? Yes. So for the Q4, Sam, the operating margins for retail were about $24,900,000 for retail and the brands wholesale UGG brand was about $143,500,000 for the quarter. Teva was close to a breakeven and the other brands were down slightly to about 3,800,000 dollars Okay. And then you did a nice job of spelling out the business. When you think about it and I think somebody asked the question, when you think about sort of the core wholesale growth next year, I mean, in the UGG brand specifically, given the line extensions that you've put out there, the Italian product, the outerwear that you're rolling out into 400 stores and so on, I mean, you're still looking for your core wholesale business to grow at a very nice clip, I would assume given the breadth of the line now? Sure. I mean, we judging from the enthusiasm we've had to the line that we've shown, we feel very positive about our growth opportunities, particularly in men's, particularly in kids. As I mentioned, you mentioned, the outerwear, accessories are a big opportunity. And the improved assortments of women's spring product, the extension of the product line with the diversification of, say, successful categories like clogs, for example, and winter, cold weather product, all of those things are growth opportunities. And we think we're doing a pretty good job of developing those categories. Thank you. And then in the numbers, Tom, did I read this right on the numbers sort of that there was like $2,100,000 of non recurring charges in the 4th quarter number, sort of that net one time charge? In the I don't for the Q4 of 2010? Right. Because you had you were having someone you said that there were more one time charges coming on the previous call for the conversion and then you talked about $7,000,000 in Q1 and probably another $1,000,000 I would assume in Q2, if I'm reading the release is correct. For the Q4, it was approximately $1,000,000 to $2,000,000 in 2010 of some start up costs relative to preparing to go direct. Is that a net number or is that a gross number? That would be a gross number. In the Q4 of 2010, the actuals? The actual one time charge that was in there, That would be a gross number. So about $1,500,000 and then tax affected? Right. And they need tax affected in the 4th quarter with the 4th quarter's tax rate. And then in all of these additional charge the additional expenses that you have in 2011, the $0.49 the $29,000,000 $8,000,000 of that truly is one time is the conversion stuff. And I would assume it's going to fall 7 and 1 and be done with at the end of the Q2? That's correct. That's for the lay of the land on the cadence as well, dollars 7,000,000 in the Q1, dollars about $1,000,000 in the Q2 and that's correct. That would be the true one time. So that's about it's about of that $0.49 you're getting back about $0.13 of it, that give or take, right? Yes, that's right. That would be right. So on a non GAAP basis, your numbers are $0.13 higher than that 10% increase in that? Right. You can see that now especially with the lower tax rate, it really drives for the bottom line more. Great. Okay. Thank you very much. Continued success. Thank you, Adam. Thank you. And we'll go next to Mitch Kummetz with Robert W. Baird. Yes. Hey, guys. This is Colton Weier calling in for Mitch. First question is on the gross margin guidance for 2011. Can you talk about biggest contributors to that being up 30, 80 basis points, could it be the mix of pricing? Yes, I mean there's a combination of things. For the total year 2011 gross margin guidance, that's what you're after? Right. Yes, there's the international lift that we talked about the $50,000,000 there that obviously drives some gross margin lift. On the other hand, we talked about the cost input pressures that we've talked about and that offsets a significant amount of that. And then when you get down to the kind of growth we're talking about in the retail stores, there's also a slight positive effect relative to more retail and e commerce in the mix for the 2011 margin assumptions. So that sort of rounds it out. Okay. And then I don't know if this is what Sam was mentioning, but what would be the overall impact of the distribution investment on the SG and A for the Q4 of 2010? Yes, it was about the 1.5 in the Q4 of 2010 and that's related the start up being prepared for January 1 with the UGG and the Benelux the UGG U. K. And Benelux business. Okay, great. All right. That's all I have. Thanks a lot guys. And our next question comes from Bob Drbul with Barclays Capital. Hi, good afternoon. Hi. Hi. I guess the first question I have is on the 15 stores for 11, can you give us any breakdown on country by country and the plans in terms of where those stores will be open? Yes. So look Bob, it looks like for 2011 in the U. S. There's approximately 2, Canada around 2. In the U. K, I think it's 1. Yes. China 6. China 6. In Japan, I think it's 2. Paris. And 1 in Paris. So that should come up with the 15. Okay. And can you comment a little bit on specifically maybe the China stores and how those are performing for you? Yes. This is O'Hare. Yes, the store in China are performing very well. We've opened like some said, we're opening usually in the second half of the year, which is the colder period over there and they performed very, very well. Great. And on the for the UGG business in 2011, can you give us an idea in terms of expectation for ASPs year over year and any changes sort of volume versus ASPs incorporated in your guidance that you gave us today? Bob, there's definitely some expectation of some increased ASPs. We were able to raise some prices and some of the newer products we introduced are at higher prices. So there's definitely an expectation of some increased ASPs as well as obviously some increased volumes. Great. Thank you very much. All right. Thanks. And we'll go next to Scott Krzyszak with BB and T Capital Markets. Thank you. Hey, guys. Tom, can you just break out maybe the biggest drivers or the chunks of the 440 basis point gross margin improvement in the quarter? What the contributions were? And just to clarify, you didn't receive any duty refunds in the Q4, did you? If we did, it'd be a relatively small amount. And year over year, what's the big driver relative to the Q4 gross margin improvement is some of it is retail and e commerce. We know we had a lot of high content of retail and e commerce in the Q4 of last year as well. So some of it is that. And the other side of it, most of it is related to we had improved margins for the UGG product. We thought a year ago we were going to have some sheepskin price cost increases and we raised some prices, but sheepskin cost increases didn't materialize for 2010. So that was the other big driver that really drove the gross margin up. Would you say it was pretty equal between the mix shift to e commerce and retail and the better UGG margins or? No, it was more relative to the UGG margins than the retail and e commerce shift. The 3rd roughly would be the retail and e commerce shift and the rest would be the UGG margins. Okay. Thanks. And then on Health, just talk a little bit about Teva. Obviously, there's a lot of momentum in the business. I think the category and the outdoor category overall is performing better. But I mean is this a situation where you are now just going to continue to take market share and fall will become a meaningful business either probably not 11, but 12 where it will really move a needle. Maybe talk about the outlook for the next 12 months to 24 months? Yes. That's certainly our expectation. We've been making some pretty significant investments over the last few years in building the Teva team and in product, particularly design, development, materials and marketing. I think a lot of what's happening at Teva is really beginning to showcase as the payoff for the really hard work that the team has done. Bringing the brand to a younger consumer, leveraging social networking, leveraging our e commerce capabilities, expanding into closed toe footwear in a diversified way, not just with a few items. I mean, and then the product is performing at retail at fairly high price points, which I've always said, sell through begets open to buy. So we're getting more open to buy based on performance. We're taking market share from brands that aren't considered to be as dynamic in the market. And we've always had this extremely important authenticity to the brand. We're a core outdoor brand. We didn't just show up as an outdoor brand important to retailers. We've been important to retailers in the outdoor industry for many years. So now there's confidence that the closed toe product we make and the performance product we make does perform. It performs both on the athlete as well as at retail with consumers. So I'm very bullish on Teva as no indication not to be. And we're seeing great response all over the world. So your $200,000,000 target by 2015, I mean that seems conservative. Well, I've learned over the years that there aren't any layups in this business, maybe in basketball, but not in this business. Never really know what's going to happen. We're going to continue to do what we're doing. And we'll try to be our own best competitor. I think that's really the way to do it. And in our minds, we're already behaving like we're a much bigger brand than we are. And I like to approach it that way. Come from that place that means you're very important to retailers and you're extremely exciting to your consumers and everything else takes care of itself when you do that. Okay. Good luck guys. Thank you. Thanks. Our next question comes from Debash Barry with Jefferies. Thanks and congratulations on a great quarter. Just trying to get a better understanding about the kind of SG and A outlook, obviously recognizing that this year is going to be an investment year for you guys. Just trying to get an understanding, looking beyond 2011 as we maybe backing out that $29,000,000 in incremental investments gets you to around a 26%, 27% kind of expense ratio. Is that the correct way of thinking about SG and A kind of longer term? And then maybe related to that, can you just talk about thoughts around marketing expense for 2011? I know you had mentioned that 150 basis points of deleverage into next year. Maybe if you can just give us the 2010 marketing spend and also 2011 incremental marketing spend whether it's in dollars or any amount percentage gain? Thanks. On the incremental marketing spend for 2011 is about $11,000,000 sort of the incremental marketing spend on UGG on the men's initiative and the women's prospect combined. Longer term that past 2011, we really focus more on an overall operating margin of 20% or above, low 20s kind of thing is really how we focus anything on 2012 and beyond. So that could be a combination of SG and A expenses versus what margin and so forth. So that's really how we approach past 2011 at this point in time. Got it. And then I guess my second question is just related to the international transition in the U. K. And Benelux. How is that going so far? And then just related to that, just thinking about the trajectory of organic growth in that in those regions, should we expect to see some kind of acceleration in growth internationally once you kind of are up and running with an own model out there? I'll take this one. This is Zohar. As some of you know, I'm right now in Europe handling the transition, running the operation until we find a replacement for the European head that shows to be coming up in the next few months. The transition is working well. The type of analogs for last year, the whole distributor, the whole stuff stayed in place. So it was a smooth transition. And we are also going through the same thing with Ag and Simple in the Benelux that the whole organization is in place. In the UK, we had to basically establish almost the whole organization from the beginning to hire people and that's some of the costs that Tom was talking about that you're investing ahead of taking over, which was done in Q4 of 2010. And we are shipping to the spring 2011, been taking orders for fall. So overall, we are pleased with the transition. As to the potential expansion and the benefits of us taking over, as Tom indicated, the Benelux distributor has done a very good job in presenting the brand in the Benelux. So the benefit that you will see there is continuing the expansion of the ag brand growing the line and also the growth of the e commerce. In the UK, we clearly have, as Angel mentioned, greater opportunities there as we are expanding more the line over there and adjusting the distribution. Great. Thanks a lot and much luck in the future. Thank you. Thank you. Our next question comes from Chris Vezia with Susquehanna Financial Group. Good afternoon, everyone. And as usual, congratulations on a great job. An easy question for you, Tom, I hope, just the tax rate. You said, I think, 33%, if I'm not mistaken, for 2011? That's right, 33%. Okay. And that's just due to the mix of business domestic versus international just more international tax rate goes down, correct? Right. There's more international profitability now than now that we're direct. So that's what drives that. Okay. 2nd, maybe a tougher question here. The shift just because of the distributor model to a sub model between Q what happens in Q2 and usually you ship to your distributors, you're obviously not going to do that here. I don't know if there's any color you can give just the magnitude of the shift. Does that mean international revenues could be down because what you're shipping to your subsidiaries is more than offset by the absence of a distributor? I'm just trying to understand what just directionally that impact could be, if that all I can add to that? Yes. That has a significant impact in the Q2 and especially last year's Q2 we had a really strong Q2 with our international distributors. So directionally correct international sales in the Q2 of 2011 could be down a significant amount relative to 2010. Okay. All right. Could it and I know you're not going to give any specific earnings color to the Q2, but just given the investments you're making in the businesses, I mean, could this most significant amount of pressure certainly could be in that Q2 just given the fact it's your lowest volume quarter? Is that fair enough? Yes. I mean, we gave some color already earlier in the call relative to the first the different investments that we've broken out separately have different cadence. The legal is more of an even cadence during the year. The advertising is more back end loaded. The international transition is really mostly in the Q1. But we still have we have 9 new stores this year compared to a year ago in other fixed costs. So the Q2 has a lot of pressures as a result of all that. The real good news is there's a lot of leverage in the Q3 and Q4 as we're now direct and we're shipping this product directly to wholesalers at a higher margin internationally in the Q3 and Q4. And then, margin internationally in the Q3 and in the Q4. And then with 9 additional stores and more stores coming in later in the Q3 and in the Q4, you get a lot of growth in the back half of the year. Okay. Helpful. And the last two questions. Just I'm going to ask the cash question. Obviously, you're investing in the business, so I think that seems to be the near term priority. But just your thoughts there on the acquisition front, if anything at this point at all. And lastly, just on e commerce, great job in the Q4 and some of the things what you're talking about in terms of offering some exclusive product online to drive consumers there. Are you going to continue to do some of that or think about expanding that in 2011 to continue to drive that, I guess, that domestic e commerce business? Just some thoughts there. Well, let me start with that question. And I didn't mention any exclusive product. I mean, we the Italian collection is premium distribution, new luxury distribution. It will be offered in our own stores. It will be offered to selected retailers and it will be offered online. So I think that that is a way of diversifying the mix of consumers who come to the brand for lots of different reasons. We are always using a variety of techniques to get closer to our consumers via e commerce and now social networking and a variety of different techniques. So you're going to see more of a pinpoint focus on specific consumers, specific demographic profiles and purchase behavior. We have a lot of long term fans out there in the market. And there is limited production product. There's product that we produce in fairly small numbers that these very loyal customers, my guess is they're going to snatch this stuff up pretty quickly. I think that if I were UGG devotee and I saw that UGG was making seems fantastic booth in Italy, I'd probably go hunt them down. So we try to do that. We don't want to be monochromatic in the marketplace, I guess you'd say. On the acquisition front, we continue to kick the tires. We've been very aggressive in looking for the right opportunity. It has to be a brand with lifestyle potential worldwide, has to be authentic and it has to come with a fairly highly evolved management team because we run pretty lean here. So all those things make the hurdle pretty high. And so we continue to drive down that opportunity road and hope we come across something in the near term. That's our it's not for lack of trying, I'll tell you that. Okay. All right. Fair enough and best of luck. Thanks, guys. Thank you. Thanks. And we'll go next to Howard Toobin with RBC Capital Markets. Thanks. And my congratulations also on a super quarter. Anil, can you give us any more detail on kind of overall marketing plans for fall? I know you have Tom Brady. Will that be mostly print and anything new on the women's front in terms of marketing? Yes. I'm pretty excited about all of the marketing. I would say that's on marketing. We have I think we've turned a major corner in becoming a marketing driven organization, which really goes to the point of being ultimately consumer driven. I'd say that in the past, we were extremely good as a product driven organization. We're very good at that, but we didn't have the type of insight that we're now able to extract through our marketing team. And that's very exciting. So that capacity and that capability has given us a better approach to designing product, showcasing product at retail, making decisions about various markets around the world and getting to know those consumers in markets like Japan and China and the U. K. So I think that that's a big opportunity and we're going to continue to develop that. In terms of specific marketing tactics, you're going to see a diversity of things that we'll do. Yes, it's going to be the conventional print media that we've done extremely well in the UGG brand and with Teva. But you're also going to see more of a focus on social network type of marketing. You're going to see a larger a bigger presence and tying into our e commerce business and creating a conversation with consumers, whether it's Facebook and our e commerce side and other types of things that we'll do. So it's pretty exciting because it's giving us a multiple path to our consumers. I mentioned the lookbooks that we're doing with the UGG brand and other brands. Those have been great. I mean that's those are very targeted examples of the product that those consumers have demonstrated a desire for and we're targeting those consumers. So it's really great to see. So and then with Tom Brady, their TV is in the mix. It just depends the timing of it depends a little bit on how this whole thing rolls up. I mean, we want to create a very authentic positioning for Tom. We think that he is appealing because he's so authentic. He's the kind of guy that people feel very familiar with even if they don't know him. They feel like he's maybe a guy they grew up with down the street, although he does have a supermodel wife and live in a really big house. But in the end, his personality is such that he's approachable. And he's the kind of celebrity and endorsement that we really proud to be affiliated with because he's one of those people who's accessible as a person and a quality individual. So we're going to take that foundation and evolve and explore the ways in which we can get that out into the market and drive on that business. As I said, TV is in the mix. Print is in the mix. Social media is in the mix. That's what being a marketing driven organization creates is those kind of opportunities. Okay. Thanks. That's great. And our final question will come from Todd Slater with Lazard Capital Markets. Thank you. My questions were answered. Just want to add my congratulations on the quarter and the year. We show all the best in 2011. Thank you, Todd. Thank you, Todd. Thanks, Todd. Appreciate it. Well, thank you all very much for joining us and participating on this call. Once again, I would just like to send a tremendous shout out of gratitude to the entire Deckers organization worldwide and to our retail partners who have been supporting our company across all of our brands now for quite a few years. We're very proud of what we've achieved. And more importantly, we really look forward to the future and the type of growth that we'll be able to achieve together. Thank you. And ladies and gentlemen,