Deckers Outdoor Earnings Call Nuggets: Weather Uncertainties and U.S. Wholesale Business

Deckers Outdoor Corporation (NASDAQ:DECK) recently reported its fourth quarter earnings and discussed the following topics in its earnings conference call.

Weather Uncertainties

Randal Konik – Jefferies: I guess questions for Tom. Tom, you gave a very interesting statement regarding your top line assumptions for 2013. You said that 7% outlook growth includes a similar winter kind of assumption to this year. Now to clarify, does that kind of incorporate similar amounts of closeouts, similar amounts of at once pre-book et cetera. How should we be thinking about that there, because the way it kind of looks to me is that the probability would increase in year three, that the winter should theoretically could get better? And then second, we have almost likely a car analogy here where almost women haven’t been buying UGGs for two years of the replacement cycle could actually get better in year three here. So just trying to get a level of what should we be thinking in that similar winter comment regarding the top line, how should we be thinking about that? That’s my first question and then I have a follow-up. Thanks.

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Angel R. Martinez – Chairman, CEO and President: Yeah, Randy, what we’ve assumed in the guidance, we are pretty cautions here in light of the uncertainty around the weather. So we’ve really assumed minimal reorders similar to what we experienced in 2012, i.e., minimal reorders and we’ve assumed similar cancellations that we received in 2012, and we received a fair amount of cancellations relatively large amount relative to our historical pattern for cancellation. So that’s the assumptions that we put into it. At this point in time we run a pre-booking process, we want to make sure we were cautious on our domestic wholesale business and…

Angel R. Martinez – Chairman, CEO and President: This is Angel. I think the replenishment component is something to keep in mind. We are the number one – in terms of footwear gifted items at the holidays, and we saw with the onset of colder weather people did Russia to replace some of the UGG product primarily it was a lot of slippers a lot of the new styles. Some of the classic products does not affect in the daily beast that is always there was an article on the resurgence of UGG Classic. So, that’s I would go where we when, I don’t think that we when, but people are rediscovering, and so that as well. It just still right now consumers are challenged by the multiple opportunities that have the byproduct, not just in retail environments, wholesale environments, but in online et cetera. So, we are sort of try and evaluate all that stuff in our assumptions.

Randal Konik – Jefferies: I’d say, just it does feel like the visibility and predictability at least we’re starting come a little bit more into focus here. I guess so my follow-up question would be definitely around the comp store sales number. So, if we look at the comp in the fourth quarter down 3-ish versus the third quarter down 13. I mean would you argue that because it’s a holiday quarter that speaks to that strength of the brand? I mean what did you see in the quarter did progress towards the up until Christmas or how did the comps in quarter kind of play out, because it was a big beat versus expectations. I’m just curious there for your thoughts.

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Angel R. Martinez – Chairman, CEO and President: Well I think first of all weather was a factor. I think certainly the back-half of December the weather did improve to what we call out weather and it was a significant factor. I think consumers are putting off their purchasing to – as we’ve said, beginning of last year even, buy now, wear now. So they’re just developing a habit of buying closer to the market, which as I think part of why we’ve made the decision that our expectation is that we’re going to see more of our business weighted towards the fourth quarter than we had seen in the past, and I think that this is also a component of the Omnichannel strategy that seems to be emerging in so many different manifestations. I mean it’s still hard to understand the full impact of Omnichannel on consumer behavior, on the impact to unconventional wholesale customers. Consumers want what they want and they want it now. And they want it in every easy way they can get it. So that has a ripple effect on a lot of assumptions and a lot of investments that people make in terms of inventory levels, etc. So this is all still shaking out and we’re being cautious, but I think we have our eyes open and we’re working very, very hard to project the impact of what I would almost call a revolutionary change in the wholesale environment and consumer behavior around Omnichannel.

Randal Konik – Jefferies: Tom, (can I sneak another) question, just a clerical question. The headquarter CapEx that you’re guiding for in 2013, are we to assume that there’s no headquarter CapEx in 2014?

Thomas A. George – CFO: Yes, and let me also clarify something. The 2013 CapEx of $85 million, $30 million of it’s for the facility and I think I misspoke when I said $15 million for everything else. It’s really $55 million for everything else, and you are correct.

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Randal Konik – Jefferies: So, $30 million of that could theoretically go – is going to away in 2014, so improving free cash flow cycle.

Thomas A. George – CFO: That’s right.

U.S. Wholesale Business

Robert Drbul – Barclays Capital: The first question I have, Angel, you mentioned the potential to narrow the account base on the U.S. wholesale business, so I wonder if you could expand on that a little bit maybe like the magnitude that you think might be necessary. And then the second question that I have is essentially around pricing on the classics, can you just talk about the pricing strategies heading into ‘12 both in the U.S. and some of the international businesses on lot of your marquee style?

Angel R. Martinez – Chairman, CEO and President: Sure. Well first of all our classic pricing we saw that, the classic pricing is something that our researchers said consumers have an expectation of quality with the UGG brand and are willing to pay a premium price, but when we push the price beyond a certain point we start seeing negative effect, and we saw that last year. We expect that we will be able with (UGG Pure) and other improvements in supply chain in the design and development that we will be able to hold our structure now and actually evolved our pricing to fill in in our product line to fill in some areas where we are leaving opportunity open to the competition. And that’s a worldwide statement. We feel that in markets like China, for example, we are price quite high and I think that we are speaking a very high end luxury consumer and there are people out there with knock off product selling out 20%, 30%, 40% below driving a very, very big business on the tails of UGG. We feel that that’s an opportunity for the UGG brand and we’re going to be developing product to address that. What was the first question again, sorry.

Robert Drbul – Barclays Capital: Distribution.

Angel R. Martinez – Chairman, CEO and President: I said before that as the brand has evolved and our men’s business, our kids’ business, our year round business, it requires a commitment of inventory, it requires a commitment on the brand by a retailer, and where we get those commitments and we see that kind of support for the brand, we have partners for life if you will. However, there are some environments where we don’t – we are not happy with the brand presentation. We are not happy with the support for the year round elements of the business, the support for the men’s product. So we have to reevaluate whether or not those are long-term participants in the brand success going forward. Consumers today expect a full brand experience when they have a brand they love like UGG. They don’t want to see a piecemeal representation and a brand I guess cheery picked and put out there in retail. So we are taking a very hard look at that, very important part of what we will be doing. When you walk into an Apple retail, you expect to see a full array of Apple products. You expect to see all the new stuff, you expect to see it celebrated in the presentation and that’s what we’ll have with the UGG brand.

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Robert Drbul – Barclays Capital: Just one more question is on the share repurchase was pretty solid. Could you maybe give us an update on the Board’s perspective or the Company’s perspective on the capital structure and the willingness to sort of take on significant debt or any level of debt to continue the repurchase authorization?

Angel R. Martinez – Chairman, CEO and President: Yeah, Bob, I think the Board is open to be more flexible from a capital structure point of view in incurring some debt. That being said, we are cautious about the business and don’t want to incur too much debt, as obviously the seasonal in the business in the third quarter, especially, there is a large consumption of working capital thereby some good size draws on our working capital line. So, I think ne-net, there’s sort of a general trend to being more open to some borrowing related to the share repurchase. That being said, we see a lot of opportunity within our own business to continue to reinvest in our own business vis-a-vis repurchasing stock. I think the last 12 months where we repurchased $221 million of stock that, I think that sends a strong message about our confidence in the business itself.

A Closer Look: Deckers Outdoor Corporation Earnings Cheat Sheet>>