Earnings Call: Q3 2010

Oct 28, 2010

I would like to remind everyone that this conference call is being recorded. Before we begin, I would also like to remind everyone of the company's safe harbor language. Please note that some of the information provided in this call will be forward looking statements within the meaning of the securities laws. These statements concern Decker's plans, expectations and objectives for future operations. The company cautions you that a number of the risks and uncertainties, some which are beyond its control, could cause Deckers' actual results to differ materially from those described on this call. Deckers has explained some of these risks and uncertainties in its earnings press release and in its SEC filings, including the Risk Factors section of its annual report on the Form 10 ks and its other documents filed with the SEC. Among these risks is the fact that the company's sales are highly sensitive to consumer preference, general economic conditions, the weather and the choice of its retailers to carry and promote its products. Zektors intends that all its forward looking statements and this call will be protected by the Safe Harbor provisions of the Securities Exchange Act of 1934 as amended and the Securities Act of 1933 as amended. Deckers is not to update its forward looking statements to reflect the impact of future events. I will now turn the conference over to your President, Chairman and Chief Executive Officer, Angel Martinez. Please go ahead, sir. Well, thank you everyone for joining us to discuss our Q3 2010 financial results. With me on today's call are Chief Operating Officer, Zohar Ziv and Chief Financial Officer, Tom George. I'll begin with a review of our recent performance, including the key drivers of the business. Then Tom will review our financials in greater detail and outline our upwardly revised guidance for the full year. Then I'll return with some brief closing comments about the future plans and strategies. Our Q3 was better than expected across the board with sales, gross margin and earnings all coming in ahead of projections. The upside was primarily driven by better than expected sell through of the UGG fall line in our company owned retail stores coupled with higher than anticipated international demand for the brand. Teva sales also contributed nicely with growth across all and regions leading to the brand's strongest Q3 in several years. From a product perspective, our business continues to diversify. The UGG brand's fall collection is the most complete line of footwear we've ever developed, including classic, knit, cold weather, casual and fashion boots, along with a broad assortment of slippers, wood bottom clogs and sneakers. I encourage everyone to stop by one of our stores, including our newest locations in Miami, Georgetown and New York on Madison Avenue or visit our e commerce site to get a full appreciation of the breadth and depth of this season's line. You'll find that we have products which can be worn for almost any occasion in and around the house, to work, in warmer cold weather and out for the evening and this has allowed us to capture a greater share of the women's market. Consumers who were introduced to the brand through their first pair of classics have followed that up with a pair of slippers. Those same consumers are now buying our cold weather product and replacing their traditional calf high leather boots with a pair from our fashion collection. Looking at the full line, you get a sense of the brand's diversity and broadening appeal to an increasingly sophisticated consumer audience. As a matter of fact, our market research indicates that 77% of UGG brand female consumers are 18 to 54 years old. Of that, 47% are 18 to 34 and 30% are 35 to 54. New for this year is our collaboration with Jimmy Choo on a special line of limited edition boots. These just began selling last week at select retailers, our ALGA Australia concept stores and our website and Jimmy Choo stores worldwide and their website. Jimmy Choo sold the collection into their distribution, so it's being carried by high end retailers like Bergdorf Goodman, Saks Fifth Avenue, Nordstrom, Harrods and Galeries Lafayette in Paris, in addition to salon independents all over the world. You may have seen the global ad campaign around this collection, including print and fashion magazines in the U. S, S, Italy, U. K, and Japan, as well as billboards and window displays in Paris, New York, London, Japan, San Francisco, and Chicago. This partnership with Jimmy Choo further validates the UGG brand as a category creator as we're seeing more and more premium brands like Burberry and Chanel utilizing sheepskin in their footwear and apparel collections. Looking at our distribution channels compared to this time last year, we've expanded our presence across our national of better department stores, specialty chains and key independents. As we previously detailed, we've increased our domestic shop in shops to approximately 100, up from 74 last fall. Our retail business continued to experience strong growth. Same store sales for the quarter were up 17.9% for those stores that were open for the full 3 month period ending September 30, 2,009 2010 and our new stores continue to perform at high levels with strong four wall contributions and quick paybacks. Teva's Q3 business was also much more diversified than previous years, thanks to the growth and evolution of the brand's open and closed toe footwear. Our collection of light hikers and technical sandals helped fuel our strongest spring season in more than a decade and has generated positive momentum as we move into the second half of the year. For fall, we supplemented our closed toe offering with additional multi sport products at 100 plus dollar price points that are selling very well. Our women's lifestyle products, most notably boots, are also off to a very good start at retail. What we are seeing speaks to the success we have had in targeting a younger, more active consumer and repositioning the Teva brand as a year round brand. Our overseas business continues to gain pace. In Europe, the UGG brand is experiencing its best season ever. Our distributors in the UK and the Benelux are supporting very diverse assortments for the fall, including greater percentage of new styles. Based on the feedback we're receiving, the response from consumers has been very favorable. We're also seeing this trend in our UK retail stores where sales data indicates that consumers there are buying all styles of the brand's new looks. We're also experiencing similar results with the UGG brand in Japan. In switching to a wholesale model at the start of 2,009, we've built an experienced team that is selectively adding new retailers, improving productivity in existing accounts, and delivering an enhanced brand message to consumers. Given the strong performance of an enhanced brand message to consumers. Given the strong performance of other luxury brands in Japan, we believe we'll continue to grow the UGG business in Japan from where it is today. In China, we recently opened 3 new UGG retail stores, with 2 this quarter in Shanghai at Plaza 66 in Hong Kong Place and the other in late June in Shenyang, Palace 66. We're also very encouraged by consumers' reaction to our stores and product line and we're highly optimistic about the UGG brand's future in the China market. Tom will now go through the financials in more detail. Tom? Thank you, Angel. In the Q3 of 2010, net sales increased 21.7 percent to $277,900,000 compared to $228,400,000 in the Q3 of last year. Net sales of UGG products increased 20.2 percent to $255,800,000 versus $212,800,000 in the Q3 last year. Net sales of Teva products increased 51.7 percent to 13.7 $1,000,000 in the Q3 compared to $9,000,000 in the same period of 2,009. Combined net sales of the company's other brands increased 26.5 percent to $8,400,000 in the Q3 of 2010 compared to $6,600,000 a year ago. Included in these numbers are global retail store sales of $20,200,000 up 63.3 percent from $12,300,000 in the Q3 of 2009 driven by 8 new stores and a same store sales increase of 17.9 percent for those stores that were open for the full 3 month periods ended September 30,009 2010. Sales for our e commerce business which are included in the brand sales numbers as well increased 3.8 percent to $8,700,000 in the Q3 up $8,400,000 in the prior year. The e commerce business faced difficult comparisons to 2,009 as prior year sales included larger closeouts for Teva and the other brands. Also included in the brand sales numbers, domestic sales for all brands increased 14.3 percent to $204,700,000 compared to $179,000,000 in the Q3 of last year. And international sales increased 48.2% to $73,200,000 compared to $49,400,000 in Q3, 'nine. International sales were 26.3 percent of total sales up from 21.6 last year. Gross margin for the current quarter improved 420 basis points to 47.1% compared to 42.9% in the Q3 of last year. This increase was driven by an increased mix of retail sales, direct distribution for the Teva brand and the Benelux, duty refunds, reduced closeout revenues and overall improved margins for all brands. Total SG and A expense for the quarter was $64,600,000 or 23.3 percent of net sales compared to $44,900,000 or 19.6 percent of net sales a year ago. SG and A increased primarily due to increases in payroll expenses due to costs associated with 8 new retail stores that were not open during the Q3 last year, operating expenses for our Direct Teva brand operation, Benelux, international distribution startup expenses as well as additional increases in variable expenses for the increased sales. Operating income for the quarter was $66,300,000 or 23.9 percent of sales compared to operating income of $53,100,000 or 23.2 percent of sales percent of sales last year. The improved operating income was attributable to the aforementioned increases in sales and gross margins. Net income for the Q3 of 2010 increased almost percent to $42,100,000 compared to net income of $33,800,000 in the Q3 of 2009 and diluted earnings per share increased 24.4 percent to $1.07 versus diluted earnings per share of $0.86 in the Q3 last year. Please note that all share and diluted earnings per share amounts discussed in the call including the amounts for prior periods take into account the 3 for 1 stock split that was distributed in July 2010. Now turning to the balance sheet, at September 30, 2010 our overall inventories increased 5 percent to $197,300,000 versus $187,800,000 a year ago. By division UGG inventory rose 3.1 percent to 180,300,000 Teva inventory increased 61.5 percent to 11,200,000 and our other brands inventory decreased by 100,000 The increase in the UGG and Teva brands inventory was required to support our expected increase in Q4 sales. In addition, at September 30, 2010, we had cash and cash equivalents totaling 250 $500,000 up almost 100 percent compared to cash, cash equivalents and short term investments of $125,600,000 a year ago. Accounts receivable at September 30, 2010 were 142,200,000 dollars compared to $112,900,000 at September 30, 'nine. During the quarter, we repurchased approximately 170,000 shares of our stock for 7.4 $1,000,000 at an average price of $43.89 per share. We have approximately $20,000,000 remaining authorized on our current share repurchase program. Moving on to our outlook. Based on our better than expected Q3 results, we are raising our 20.10 guidance. We now expect 20.10 revenues to increase approximately 16% over 2,009 levels, up from our previous guidance of approximately 14%. Teva sales to increase approximately 30%, up from our previous expectation of 13% and Teva sales to increase approximately 30% up from our previous expectation for growth in the high 20% range. Pistol grain percent. We currently expect diluted earnings per share to increase approximately 22% over a split adjusted $9 non GAAP diluted earnings per share of $2.98 per share, which excluded a non cash impairment on intangible assets of $1,000,000 as discussed in our associated earnings release. This is up from our previous guidance of approximately 16% growth. Our forecast is based on a full year gross margin of approximately 49% and SG and A as a percentage sales of approximately 25%. As a reminder, in preparation for the change from a distributor model to a wholesale model for the UGG, Teva and Simple Brands in the UK and the UGG and Simple Brands in the Benelux region in 2011 as well as the Teva brand, Benelux in France transition this year, we will incur additional expenses in 2010 with the new initiatives to establish the infrastructure necessary to support broader wholesale operations beginning in 2011. Also because of these transitions approximately $1,000,000 of sales will shift to 20 11 under our wholesale model that would have previously been recognized as international sales in November December of 2010 under the former distributor model. In total, these incremental expenses and the profit shift of $1,000,000 will have an estimated diluted earnings per share impact of $0.13 of which approximately 65% is a one time impact. Excluding these costs, we expect diluted earnings per share growth to 26% over 2,009 levels. Furthermore, due to the impact of our international pre tax income from the aforementioned expenses in 2010, our effective tax rate is expected to increase slightly to 36.8% from 36.2 percent in 2009. Our capital expenditures in 2010 are expected to total approximately 25 $1,000,000 a $10,000,000 increase from our 2,009 level of $15,000,000 and this is driven mainly by the build out of new retail stores as well as the new e commerce platform and PLM software. The Q4 of 2010, we still expect both revenues and diluted earnings per share to increase approximately 8% compared to Q4 'nine levels. 4th quarter guidance includes approximately $5,000,000 or $0.08 per diluted share of incremental investments associated with the international distribution transitions as well as the aforementioned higher levels of fixed overhead. I'll now turn the call back to Angel for some closing comments. Well, thanks, Tom. So, there's a lot to be excited about as we approach the holiday selling season and look forward to next year. We believe that we're developing great products and compelling lifestyle messaging to create strong global momentum for the UGG brand and now the Teva brand as well. We're seeing it in our markets worldwide. Retailers are hungry for our brands. Zohar and I recently returned from Asia and it was clear during our visit to Japan that consumers have developed a true affinity for the UGG brand. Our new team has done a great job of reigniting interest in the brand and they're making great headway building the right wholesale distribution and searching out potential new store locations. We saw similar trends in China, which is now the world's 2nd largest luxury market, thanks to a growing population of consumers who want the brand names like UGG and Teva, not cheap imitations or knockoffs. The sell through results from our 4 UGG stores in China speaks to this new wave of demand, which we believe will continue to grow for some time. As I mentioned earlier, our European business is doing very well as awareness of our expanded product assortment continues to spread across the continent. We're very excited about bringing all our distribution in the UK and Benelux in house and we're confident that the UGG and Teva brands are ideally positioned to attract new consumers in these regions as well as other key countries such as France, Germany, Russia and Italy to name a few. Here in the U. S, newness is driving our business and we believe that this will continue in spring 2011 as we further diversify the UGG line with additional non boot styles such as sneakers and sandals. Next month, we'll begin pre lining fall 2011 with our major accounts and we're confident that we can build on the positive storylines from this season. This is also true for the Teva brand as our light hikers and multi sport collection become more meaningful to the spring line. In fact, more multi sport product is sold in spring versus fall. So, there's a true opportunity for us to increase our share of this key outdoor category. For 2011, the financial benefit we expect from our upcoming conversions to subsidiary models in Europe is very timely. In that, for 2011, we now anticipate input cost increases will be toward the high end of the 5% to 10% range we discussed on our Q2 call back in July, due mainly to rising commodity prices. In addition, based on the global trends our businesses are experiencing and our growing cash position, we believe 2011 is the opportune time to make select strategic investments in our business that will accelerate market share gains in 2012 and beyond. Areas that we're looking at include an accelerated retail expansion, increasing the number of annual store openings beyond the nine planned additions that we have this year, new marketing and sales initiatives to accelerate the Teva brand's growth and increasing awareness for our Subo brand. On a larger scale, we believe there are significant growth opportunities to the UGG men's line and our recent market research for UGG products indicates that we still have significant growth opportunities with women. Therefore, we plan to increase our investment in the UGG brand to bring our brand spend as a percentage of sales up to be more in line with premium global brands. This should help us capitalize on the global opportunities we believe exist for the UGG brand in both men's and women's categories. Lastly, we'll be investing in additional advertising and point of sale materials to support our transition to wholesale sales in the UK and Benelux. We're still in the planning process for the next year and continue to evaluate the most effective ways to deploy our capital. We will lay out our investments and the benefits when we discuss our 2011 guidance in our next call in February 2011. In addition, we continue to evaluate potential acquisition opportunities. And we remain very optimistic about the long term potential of the UGG and Teva brands and are becoming more excited about the prospects for the simple, Subo and Anu brands. Everyone at Deckers is energized about the business and our global organization is focused on successfully executing our growth strategies to return significant long term value to our shareholders. Operator, we're now ready to open the call up for questions. Thank you. We'll now be conducting a question and answer session. We ask that you limit questions to 1 and one follow-up to accommodate as many questions as possible. If we have time, we will repull for Our first question comes from Sam Poser from Storn AG. Good afternoon, everybody. Can you just give us a breakout of the operating all the operating income by segment just to help us? Yes. Yes, Sam, I can do that for you. We had strong operating income for the quarter. So UGG is obviously the biggest driver there. And then Teva and the other brands are lower numbers more at the breakeven of level for the Q3 in the retail stores. And keep in mind on the retail stores, we charge them cost of goods sold at wholesale. So they have lower operating margins compared to total vertical margin when you include the brand margin, which is included in UGG. Right. Do you have the numbers or is that we have to wait for the queue? No, I'll go ahead. And so for UGG wholesale, which includes the the brand margin on the retail store was about approximately $96,000,000 Teva and other brands is close to a breakeven. E commerce was approximately $1,000,000 of operating income. Retail stores close to $2,000,000 Then there's an unallocated corporate type overhead costs that go the other direction of approximately $30,000,000 and that gives you the $66,000,000 of operating income. Thank you. And then thank you very much. And Angel, when you were in the when you were looking at next year, I mean, can you give us some read through as to you talked about your additional investments. Can you give us some idea of how you're looking at the impact to gross margin next year with those with the Benelux in U. K. And France switching over? Well, I mean, we anticipate gross margin to remain consistent with where we've been. Our fundamental focus is to drive the business in those markets where we feel we have market share gain opportunities. So, certainly in the UK and Benelux, we've put together a very strong sales force. We've established the brand across the wholesale spectrum as well as our own retail across the wholesale spectrum as well as our own retail operations. I think it's to that point now where the brand will benefit from more aggressive competitive approach to the market from us, meaning that more rollout of our shop and shop program, spread and assortment across the wholesale channels. We'll be developing our e commerce platform to really go after the market and we anticipate as we roll forward that the Benelux will be moving in similar directions. Okay. Thank you. I'll get back in the queue. Thank you. Our next question comes from Todd Slater from Lazard Capital. Thank you and congrats. Super job. It sounds like you're going after the retail store opportunity even outside of the U. S. Maybe even more aggressive than the U. S. I'm just wondering if you could talk a little bit about how that strategy is now evolving. You've been into it for several years, both inside and outside of the U. S. And then the other question was, if you could talk about where you stand on evolving the UGG brand into more of a lifestyle brand in terms of apparel and accessories and licensing and all the other parts of the equation there? Thanks. Okay. Yes, Todd, as far as retail goes, it's a very difficult thing to ignore the consumers' love for the brand when they are exposed to the total breadth and assortment of the brand and in an environment that reflects the brand vision. And we've been seeing that as we've been refining our approach around the world. As I mentioned, Zohr and I were just in Asia and compared to what we see in Europe, we see the same thing happening in Asia with consumers responding in exactly the same way. So, the opportunities that exist around the world for us to solidify the category leadership of UGG is very important and one that retail does better than anything else, particularly in markets like Asia, whether or rather like China, where there is no wholesale business. It is only brands are built on a retail foundation. And so for us to dawdle too slowly into that market, I think it puts at risk the category leadership opportunity that the brand is known for and the brand has established. So we're going to keep moving on that front and we will move aggressively for us. It doesn't mean we're just going to open the doors, open retail doors willy nilly, but this is we take this seriously. I've said from day 1 that our stores need to make money. They're not marketing expenses. So and we're running very profitable stores. When it comes to the apparel and accessories, we're very profitable stores. When it comes to the apparel and accessories, we have been refining that approach. As you know, we've had cold weather accessories through a licensee that's hats and gloves and scarves. That's doing very, very well. And we have now begun the process of developing our own handbags and our own outerwear and that business as well as by the way we're doing knitwear for this fall as well. That business is very important as we round out our retail assortment. It's critical to have a complete brand story at retail. We're now developing to a base number of stores that allow us to do small runs of outerwear, small runs of knitwear, small runs of handbags and that creates a well rounded assortment of retail, which when our wholesale customers see that, it creates demand for that product in the wholesale environment. So, we're building it in that sense very methodically, obviously tying in the shop in shops as we've developed them around with key retailers as well as the Internet. So that's really the approach we're taking. We've got some great Jimmy Choo windows here in the flagship Saks store in New York. They are beautiful. Thank you. Well, anyway, good luck next quarter. Thanks. Thanks, Scott. Thanks. Thank you. Our next question comes from Sean Naughton from Piper Jaffray. Hi. Thanks for taking my question. First, on the gross margin front, could you give us an idea of Tom, you gave us some of the breakdowns of the gross margin improvement of 4 20 basis points. Just wondering if you could codify some of those numbers for us? And then secondly, obviously, talking about sourcing costs being towards the higher end of that 5% to 10% range. But I think, Angel, you mentioned that you were looking to hold gross margins relatively consistent to this year for next year. That's kind of the goal right now, it sounded like. But just wondering how that's going to work. Should we expect a combination of potential ASP or mix between retail and international? Just how should we think about that for the next 5 quarters here next year? This is Tom. I'll go ahead and respond to the 'nine to 'twenty the 2009 to 2010 comparison. So we were up 4 20 basis points. The lion's share of that was really almost 200 basis points. So that was just improved initial margins on the UGG brand, especially on the UGG brand as well as the other brands including Teva. Then some of the other items I mentioned, reduced closeouts and markdowns was about 40 basis point improvement year over year. We had a small amount for the residual amount of duty drawback, duty refund that was only about 30 basis points. So higher content of retail sales this year compared to a year ago is about 50 basis points. And the fact that we're direct in Europe with Teva, it's a smaller Teva quarter, but that's about 10 basis points to 20 basis points of improvement. Sean, this is Zohar. As regards to your question about I mean the product cost and how we're going to maintain our gross profit margins, as we indicated, the increase of the cost is really coming mainly from the commodity. So we're going to be in the top range of the 5% to 10%. How we're planning to hold our margins is a combination of both increasing prices more appropriately and also getting the benefit of the conversion, our international distribution to a subsidiary and moving more internationally and also combination of going direct and increasing our retail operations. Okay. And then maybe just on the marketing, you talked about maybe you could just elaborate a little bit more on some of the things that you could potentially be embarking on in terms of new marketing initiatives on particular demographics that you may be going after more aggressively? And then any way you could quantify the amount of that additional marketing spend that we could potentially see next year? Yes, you'll see, for example, I mentioned the women, female consumers and 77% of them are between the ages of 18 54. There is a very large percentage of the population that is that we call prospects. These are people who have expressed an interest in UGG, an affinity for the brand and have just not had the exposure to it or not had the opportunity to purchase it, having purchased intent. And so that's an opportunity for us to add to the following that we have for the brand in the core audience of female consumers. The men's market is a market that we feel we have a very good opportunity in given the success we've had traditionally with cold weather product and our success with slippers and recent success with some casual product we've made and sneakers. From a brand perspective, if you really sort of look at us historically, the UGG brand has spent about 2.5% of sales 2% to 2.5% of sales on marketing. Other brands of this caliber, for example, Ralph Lauren, brands that you know worldwide are very successful lifestyle brands and fashion brands spend 3.5% to 4%. So the delta between the 2% and the 4% is an opportunity for us to very selectively and very methodically put marketing dollars at work to grow our brand franchise and solidify a larger consumer share. And you'll see us doing that. You'll see a mix of marketing activities from social network based to more conventional media to certainly in store presence and a variety of things like that. That makes a lot of sense. I'm sorry, all those times are still coming together as you know and we'll be able to talk more about that in the February call. And then just quickly, lastly, it sounds like Teva, a lot of gains being made there, it sounds very promising. Can you remind us just how big you think that business could ultimately be just based on what your expectation is to that right now and when you could hope to achieve your long term goals or near long term goals for that brand? Thanks. Sure. It's not unreasonable to see the Teva brand double in size over the next few years, particularly with the momentum that we're gaining outside the United States. The brand is actually very famous and authentic in Asia, especially in China. We're really just scratching the surface as to what we could do in China. So without getting too far out on the horizon, if you look at a Seva brand of $100,000,000 could you see a $200,000,000 Seva brand in the next 3 or 4 years? I think it's very, very reasonable. I think it's very doable. And now that the product line has come together as a year round brand, male and female and kids, that makes that potential much more realistic and everybody is pretty excited about that. Great. Best of luck in the Q4. Thank you. Thank you. Thank you. Our next question comes from Chris Svezia from Susquehanna Financial Group. Good afternoon, everyone, and congratulations. Thanks. I guess just first, I just want to go back to the input cost question, high end of the 5% to 10% increase. I guess everything that you guys are doing with regard to sourcing in China and moving more inland, something you've done already. And obviously looking to Vietnam, how much of that potentially Vietnam, how much of that potentially offsets that or mitigates that pricing pressure to a degree? I'm just trying to get your sense there and maybe just give us an idea how much is Vietnamese sourcing versus sourcing in Mainland China? Chris, the main impact for the increase of the cost toward the upper end of the 5% to the 10% is really from the commodity, which is really the sheepskin for us. So we have done as you said, we have moved the operation from Southern China to Northern China to Vietnam. You do get some benefit, but the driving force was really the commodity costs. So Vietnam, even the pricing is a little bit lower than China, what you do get, the productivity is lower. So you're not getting significant benefit, but what you're getting is you're holding increases vis a vis the price increase in China. And also you're getting a stable labor force, whereas the challenge in China, in Southern China have been the labor force where it's a migrant type of labor force in Vietnam, the people live around the factories. And one thing, Chris, that we refuse to do, we won't do is lower the quality of the sheepskin that we select for our production. Almost without exception, you'll see the people doing the knockoff brands and obviously the counterfeit folks, they're buying the lower end of the sheepskin available and probably getting that a little bit cheaper price than what we're paying, but we just refuse to go there. We think our customer deserves a lot more than that. Okay. That's helpful. And then just I'm curious, I guess, 2 questions, I guess, quickly for you, Angel. Just your thoughts about this holiday in terms of any I mean, obviously, you're off to a good start. It seems like you made some comment about you've seen some incremental acceleration in the business and sell through as you got into the Q4. So it seems like you feel very confident about holiday and how it will unfold. But secondarily, any thoughts about pre books for spring? Obviously, you have that put to bed, it seems, at this point. Can you get any color or commentary in terms of what you're seeing? Obviously, Teva, I think, is pretty strong. I would assume you're pretty happy with what you're seeing there. But any thoughts about how the UGG pre book look for spring? Thus far, any color you can add to that would be certainly helpful. Well, it's obviously difficult to talk about spring at this point. Put it this way, we really don't we're not disappointed. We feel that the brand momentum continues across all channels of distribution and there's been a lot of excitement as we've seen it for the new line. So and a lot of excitement and I'm sure we'll also emerge for the fall line that begin pre lining here in the next 3 to 4 weeks. Okay. All right. Thank you very much. Best of luck. Thank you. Thank you. Our next question comes from Shi Lee from Morgan Stanley Smith Barney. Yes. Actually, this is Steven Gregory of Mandalay Research. A couple of things. You guys mentioned that e commerce sales increased 3.8 percent to $8,700,000 but it's kind of skewed because of last year's closeouts. Can you provide some color on the call today as what is your conversation going forward for the next couple of years and how do you plan to get there obviously initially with the relaunch of your platform? Can you clarify that a little bit, please? What is your e commerce vision going forward? You're relaunching your some of the different sites doing the platform. What is your e commerce vision going forward? And how you plan to expand your sales online? Okay. Well, I think one of the things that we're seeing is that e commerce, whereas it may have started out as a selling vehicle, if you will, in other words, brands almost by default found themselves developing an e commerce platform just to do complete a transaction, perhaps enhance some customer service, so consumers kind of make it easier to get to their brand. We think now that e commerce is an intrinsic part of the brand experience. We feel that e commerce is by some consumers the way they educate themselves about product and then they go to a retail environment or in many ways e commerce completes a relationship with consumers. They feel that they need they are inviting they are being invited into the brand itself and are able to have a special relationship with the brand. So e commerce is evolving as a very core component of our marketing strategy. I think social networking is another core component of the marketing strategy. And when all of it is looked at, you cannot separate what's happening at retail environment with the shop in shop environment, with an e commerce, a social network environment and a media environment. So our platform, what we're developing is going to allow that kind of flexibility, that kind of technical capability to allow a consistent message and a timely message, almost a real time message for consumers who value the brand and want to be a part of the brand experience. And obviously, that's not easy, but I think that's the future. It's the future certainly the future marketing and certainly the future brand building. Okay. And then a follow-up to that. What are you guys doing in terms of bringing more people to the site, obviously social networking, etcetera? How are you going to capturing new customers? And are you building any type of apps for the mobile phones to allow customers to download to their cell phones, allow them to purchase products on your website? Yes, we're looking at all of those things. I mean, right now, if you look at the UGG fan base, UGG has, I think it's 440,000 Facebook fans, which is a crazy number, especially when you consider that we really haven't done much to enhance that list building capacity or fan building capacity. We have so many fans coming to the brand just out of enthusiasm. What we do with those fans and how we react with them, that's what's emerging. And I wish I could be more specific than that, because those plans are developing, we're doing quite bit of research right now and we have employed very capable outside resources to help us refine this strategy and by the way, it's a moving target. It's something that's emerging as we speak with new platforms like the iPad, with new technologies that allow from barcode scanning and messaging, instant messaging on your iPhone, on and on. So it's something you must get plugged into and stay on top of and that's what we're doing. Yes. And this is Zohar. As a follow-up, in addition to the various social marketing methods that are there that we're already doing and using outside consulting to help us with that, we're also upgrading the technical capability of the site. So we are implementing a whole new platform that we're going to be in operation next year and would allow us also to expand and take e commerce overseas. So we are expanding our e commerce operation overseas. And as to the potentials, for example, I know that the e commerce sales for the quarter were slightly over 3%, but the ag e commerce this quarter grew up 16.5% domestically. So that's greater than what we've done in the domestic wholesale. So it was a nice uplift from e commerce. Thank you. Our next question is coming from Scott Krasit from BB and T. Thanks. Just wanted to parse through some of your comments on how the business accelerating is that across the board and there have been a lot of reports that the Classics business lagged in August September, so you are specifically referring to that fashion, what are you talking about? In August September generally speaking, especially when you have heat waves in various parts of the country, our business obviously kicks off when the weather cools off in terms of Classic. So every year around this time, we hear lots of comments about the Classic business slowing down and every year around this time, about a week or 2 from now, you'll have a little cold snap and suddenly there's a rush to retail for the product. We feel that and what we've seen, seen strong evidence of this that UGG has created a category and the category is led by UGG and love affair that consumers have with the brand as the authentic and most legitimate brand out there. That said, the market, any market will always grow, mature, develop and evolve. We have to stay ahead of it with innovation, with technology, with great design and that's what we're making investments into. We have been doing that since I came here and before. So it's just an ongoing part of trying to lead a market and every year the challenge is to be our own best competitor. Right. That's a I mean that leads me to my follow-up, I guess, and it's a good problem to have, but retailers that we spoke with have said that the fashion products have sold great, but they don't have enough of it and you guys didn't invest in inventory to back it up to support them. Do you think you're aggressive enough in terms of moving the brand forward? Yes, we do. We feel that certainly with our retail distribution and the quality stores, we work very closely with them to keep developing their brand, the UGG brand in those stores. You can see the penetration of spread and assortment. We plan very aggressively the increases in the classic business we have every year. And I think what's happening, what you're seeing is classic is not very narrowly defined by us anymore. I mean the classic category is a fairly large category. It includes a lot of different types of products. So when you talk to a retailer about how is classic doing, if they're defining classic as chestnut sand and black, classic shorts and not including in the definition of classic, all the other products that are emerging from when we've done the Carty boots and a variety of other things, I mean those are all classic and those have been accelerating very nicely. Yes, I guess I was thinking more along the lines of the riding boots and the wooden bottom clogs and those sorts of things. Yes, we wouldn't follow those classic. That's more new product. That's some of the diversified product line that you're announcing, which you mentioned it, I mean that is growing significantly and it is dimensionalizing the brand at retail. It's very exciting to see that happen. So the consumer is seeing UGG as much more than what they originally came into the brand experience and that's a good thing for everyone. Sure. Okay, thanks. Thank you. Our next question comes from Omar Saad from Credit Suisse Group. Thanks. Good afternoon. Hi. I apologize if you've already said this, but I was wondering if you guys could share with the just focusing on the UGG brand, what the U. S. Wholesale number look like? And maybe give us an update on your channel strategy for UGG in the UGG. Are you guys thinking about expanding into new distribution or staying tight on the existing distribution? I'm sure there's a lot of retailers out there knocking on your door, dining at the brand in house. And then I have a follow-up question on some of the new brand initiatives you have. Omar, this is Tom. I'll go ahead and give you the growth in our UGG U. S. Wholesale business. So for the quarter it's up around 10% year to date it's up around 10% as well. So we're pleased with that and then I'll turn it back over to An. As far as our distribution, there are still sections of the country where we can develop the brand further the Southeast primarily just opened a store in Miami, which is doing quite well in its 1st few weeks of operation. The market has continued to evolve, as I mentioned, from its original chestnut sand black and classic tall and short and ultra in some markets now to a very diverse product assortment. So we feel that we have a broad enough diversity of quality retailers that can take the brand through growth by category. In other words, category growth of brand, women's, men's, kids for the very near term. Beyond the current core of our customers, we see obviously opportunity with our e commerce platform. We see opportunity with expansion of doors by our current customers, Nordstrom for example opening more doors, key independents who may open doors and of course our own retail store operations. We also feel it's very important for retailers to be profitable with our brand. They have been and will continue to be because I think we're very careful in how we manage our distribution and we intend to continue that. Okay, that's helpful. Thank you. And then on the brand investment, very encouraging to hear that you're trying to really build it into a global brand, put the resources behind it. Do you or have you considered working with agencies around the world or at least in the U. S. To think about different marketing platforms? Are you going to kind of stick with what's worked from a marketing standpoint so far? Well, marketing is one of those things that it has to keep evolving, it has to talk to the consumer in a language they understand in each market. And when I say language, I mean the marketing language. So, the platforms that we've been using, which have been more traditional, I think the more traditional lifestyle and fashion orientation, we've been building the brand through very important fashion magazines. We've used outdoor signage, billboards, etcetera in key cities. We've used retail presence and what we call DSM, which is the in store presentation. We'll augment all of that stuff. We were just talking about social network, so all of that stuff. We were just talking about social network, social networking as a vehicle, that's going to ramp up. You will see the brand showing up in what I would consider more opportunistic environments like events that may be happening in key cities. We've done some things around the world that have been very exciting over the years. We'll continue to do those in key markets around the world. When you have a retail platform that allows you to bring consumers into a location that creates buzz and opportunity for your PR efforts. So it's really a total mix of marketing. Our job is to figure out what the return on investment is with each of these categories of spending and marketing and drive obviously more money to those things that have proven the work. The good news is that you now have the capability to measure that ROI, whereas in the past, as the old adage went, 50% of advertising work by just something which 50%. So here in this case, we've got an opportunity to be much more precise with how we're spending our money. Thanks. Great quarter. Congrats. Thank you. Thank you. Our next question comes from Jim Duffy from Stifel Nicholas. Most of my questions have been answered. I did have one question on the sneaker line. Can you talk about where you're hoping to take that? That's been a nice contributor for you this year, should be a 4 season contributor and seems to have a lot of potential. Where do you see this going next year and in future periods? Well, what's great about the sneaker business, when I and I'm using that term loosely, because in a sense these are casual shoes that are designed to look like sneakers. You're not going to go out and play any sports in them. But the opportunity for color is fantastic when you start developing sneakers. You can mix and match materials and fabrications in ways that you traditionally don't do in more contemporary classic styles of casual shoes. It obviously appeals to younger consumer. It allows you to it allows you to fresh and up the brand presentation with a lot of color and material differentiation by channel of distribution because obviously some of your retailers might have an older consumer, might have some have a younger. So it offers I think a lot of opportunity to keep that consumer that other consumer excited about coming into retail. And it's just fun. It's fun product, fun to wear and fun to buy. So Anil, my sense is this could become a meaningful contributor. Am I off base there? I know it was small this year, but does it become meaningful in future periods? Well, I think I have a very good idea of how meaningfully contributory sneakers can be having participated in that world for a long time. So, yes, this is a big opportunity for us. I think that we are being we're trying to look at it with a different eye. It's you kind of ask yourself the what if question, if UGG were a sneaker, what kind of sneaker would it be? And I think we've been asking ourselves that and we keep coming up with surprising answers that consumers keep validating. So we'll keep doing that exercise. Okay, great. Best of luck. Thank you. Thank you. Our next question comes from Bill Dezellem from Tradin Capital Management. Thank you. That's Tieton Capital Management. And you had mentioned in your opening remarks that you had increasing enthusiasm for the Subo, Simple and Anu brands. Would you please discuss what's leading to that increased enthusiasm, please? Well, my enthusiasm is always really taken from the retailer's enthusiasm and my measure of success for an Upstart brand is how willing our retailers to give you more real estate, broaden the spread maybe push something off the shelf and replace it with one of your items from a small brand. That's very difficult to do today. I mean, if I could snap my fingers and say, well, we're just we're just going to use the power we have in the market to force product into distribution. We don't operate that way. We feel every brand has to stand on its own merits and excite the consumer. So retailers seem to be agreeing that these brands are gaining momentum. There are some great styles, some great designs, great price points and we're gaining market share, we're gaining shelf space. So that's where my enthusiasm come from and it's coming from what I'm seeing all over the world. It's not just the U. S. Now of course these are still small brands, but we really do have to start somewhere. And we had a lot of fixing to do across the board with these brands and to get them, I think, properly defined and envisioned and really build that brand platform for growth. And I think we're getting there very quickly. So, I'm looking forward to significant things in the next few years from the smaller brands. Thank you. And following up on that, of the 3 brands, which of the 3 if you had to choose would you be finding the most enthusiasm by retailers? Or maybe said another way, which one could hit $50,000,000 the first of the 3 of them? You are asking me which of my kids is the best looking. It's a really tough question to ask, but I don't think I can answer and not get myself in huge trouble. It's just part of it depends on how you want to define. Like for example, if you take the Simple brand and the product that made Simple famous for so many years, the I should call the old school and a woman should call the sugar and those items were in a sense back burnered for a few items were in a sense back burner for a few years and now they are being brought back to the front and what we are finding out is retailers love those items. Those are great items. They just wanted more color, more excitement, more assortment, more freshness. So when we are showing simple in the more what I would say the back to basics simple that we have been talking about with retailers in the last few months, there is a heck of a lot of excitement about that and guess what that is a very big category of products. So and with a very big pipeline to fill, So Vans sells a lot of shoes, Converse sells a lot of shoes. I wouldn't mind being the number 3 brand in vulcanized canvas products of Vans and Converse. That's a big opportunity. So maybe Simple could be of all of them, the one that gets to a bigger number quicker because it's got a bigger pipeline opportunity. That said, Subo is a brand almost at the other end of the spectrum, which is very exciting from a design point of view, the leadership brand in design. It breaks a lot of molds, if you will, in terms of what is contemporary and how do you find that intersection of style and comfort. So and we don't expect that brand has a giant pipeline to fill, but if we could be with Subo in every key footwear boutique that we need to be in, in the U. S. And the rest of the world, that's actually a pretty significant objective and a very important thing to do. So it's kind of a different brand for a different purpose, if you know what I mean. Thank you and keep loving those children. Thank you. We have time for one further question. Our last question comes from John Hirsch from Sheffield Management. Hi, how are you? I was wondering, you commented on how important it is that the weather always breaks sometime around this year. Are you finding any problems in terms of just customers getting nervous or wholesalers getting nervous with the weather staying warm across the country through November? I thought if we look back to last year, you really would have already seen it break at this point. And obviously, no one can control the weather, but curious at what point you actually would get concerned? Well, I mean, if it's 85 degrees on January 15th in New York City, that could be a problem. But in the end, obviously the weather is pretty cyclical. If you look at California as an example, a middle of winter here in Southern California, it's what 70 degrees, 65 on a cold day and we saw a lot of UGGs in that environment. It really has to do with does it chill, is there a chill in the morning, is there a chill in the evening, it's UGG weather. It's about a time of year as much as it is the actual temperature outside. Now, functionally, staying warm, sure, that's very important. And when the weather gets cold, the UGG product doesn't come off the feet at all. I mean, so it's almost like at the time of the year that's emerged for UGG UGG as much as it is an actual temperature. Every year there are different cycles. A few years ago it got it was pretty warm all the way through October, all the way through the beginning of November and then what happened is that we got pretty crunch for demand and the weather just got a little colder, it didn't get really cold. So it just depends. It's a brand that consumers have a love affair with for a whole lot of reasons. Cold weather is just one of reasons. Got you. Thank you. Thanks. Thank you. I would now like to turn the call back over to Mr. Martinez for any closing comments. Well, thank you very much for all of your questions and for participating on this call. Clearly, it's been an excellent quarter. We anticipate that we continue on our trend. We're very much looking forward to the February call where we can give you more detail on what we're planning. And it is important for us to really thank our entire team around the world, specifically our newly emerging team in Japan, our new emerging team in the UK and Benelux as well as all of our retailers around the world. We really appreciate your support and look forward to being able to continue to develop your businesses together. Thank you.