Steve Fasching - Vice President Strategy & Investor Relations Angel Martinez - Chairman and CEO Dave Powers - President, Deckers Brands Tom George - CFO

Jonathan Komp - Robert W. Baird Taposh Bari - Goldman Sachs Corinna Van Der Ghinst - Citigroup Randal Konik - Jefferies Mitch Kummetz - B. Riley Scott Krasik - Buckingham Research Chris Svezia - Susquehanna Financial Group Jim Duffy - Stifel

Good afternoon, ladies and gentlemen, and thank you for standing by. Welcome to the Deckers Brands' Fourth Quarter and Fiscal 2016 Yearend 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 up for questions. [Operator Instructions] I would like to remind everyone that this conference call is being recorded. I would now like to turn the call over to Steve Fasching, Vice President, Strategy and Investor Relations. Thank you. You may begin.

Welcome everyone joining us today. On the call today is Angel Martinez, Chief Executive Officer and Chair of the Board of Directors, Dave Powers, President and Tom George, Chief Financial Officer. Before we begin, I would like to remind everyone of the company's safe harbor policy. Please note that certain statements made on this call are forward-looking statements within the meaning of federal securities laws, which are subject to considerable risks and uncertainties. These forward-looking statements are intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. All statements made on this call today other than statements of historical fact are forward-looking statements and include statements regarding our anticipated financial performance, including our projected net sales, margins, expenses, and earnings per share, as well as statements regarding our business transformation plans, product and brand strategies, market opportunities and restructuring plans. Forward-looking statements made on this call represent the company's current expectations and are based on currently available information. Forward-looking statements involve numerous risks and uncertainties that may cause actual results to differ materially from results predicted, assumed, or implied by forward-looking statements. The company has explained some of these risks and uncertainties in its SEC filings, including the Risk Factor section on its Annual Performance on Form 10-K. Except as required by law or the listings of the New York Stock Exchange, the company expressly disclaims any intent or obligation to update any forward-looking statements, whether to conform such statements to actual results or to changes in its expectations or as a result of the availability of new information. With that, I'll now turn it over to Angel.

Well thanks, Steve, and thank you to everyone, for joining us on today's call. We closed out fiscal 2016 with a solid fourth quarter performance that was highlighted by double-digit topline and EPS growth on a non-GAAP pro forma basis, a meaningful increase versus a year ago. I am proud of our team's perseverance following a challenging holiday period to deliver non-GAAP results that exceeded guidance, while also executing the strategic initiatives and restructuring that we believe will allow the company to gain market share and deliver profitable growth over the long term. With that being said, we're aware that the retail industry continues to undergo a significant structural change fueled by technology that is changing consumer behavior and impacting what they buy, when and how they buy it, and how much they pay for it. To succeed in today's environment, companies not only need authentic brand position and compelling on-trend product, they must also have the infrastructure that supports direct and personalized dialogue with consumers, efficient premium service levels, a customizable differentiated shopping experience, and the ability to scale internationally. The strategic initiatives we've made over the last five years have put the company in a great position to win on these critical fronts. This is included building a highly advanced global Omni channel platform, enhancing our supply chain including the addition of a new state-of-the-art distribution center, bringing in experienced professionals to work alongside our talented group of employees around the world, and developing a strong international presence. On top of this, our product engine is stronger than ever with new innovations fueling excitement and freshness throughout our brand portfolio. With a solid foundation now in place, I've decided that this is the right time to retire as Chief Executive Officer, effective May 31. Our succession plan has been something that the Board and I have been working on for quite a while now. It was incredibly important for us to find the right person and I am proud to announce that Dave Powers will assume the CEO role. Since joining the company in 2012, Dave has exhibited all the qualities that we need in the company's next leader. As many of you know, Dave is a seasoned footwear and retail executive with a career that includes Senior Leadership roles at Nike, Timberland, and The Gap. I've great confidence that he is absolutely the right person to elevate our brands to new levels and drive the company forward. I'll now hand it over to Dave.

Thanks Angel. Let me first say that I am honored to be given the opportunity to lead this amazing company. I want to thank the Board and Angel for the confidence they've shown and continue to show in me. It has been a privilege to work so closely with Angel these past four years, and I feel very fortunate that I'll be able to benefit from his continued involvement in the business as Chairman. I am very optimistic about the long-term potential of our brand, and I am eager to continue the tremendous progress the team has made building a stronger organization to support the many growth opportunities still ahead of us. With that, let's turn to our recent performance. In fiscal 2016, we made several changes to the organization to drive long-term value and improve our competitiveness. This included adding new leadership within our brand and to our Omni channel division, streamlining and restructuring our brands to create operating efficiencies and synergies, improving our retail store footprint and aligning our organization to improve the consumer experience. We believe these changes have prepared us to navigate the evolving retail landscape and will lead to long-term success and an increase in shareholder value. I'll now review our two Lifestyle Groups Fashion and Performance and then cover our results by channel. Beginning with Fashion and Lifestyle, as we announced last month, we appointed Andrea O'Donnell to lead this group. Andrea joins us recently from the DFS Group, a multibillion dollar retailer owned by LVMH, where she served as President of Global Merchandising. We're excited to have her on Board and believe our teams will benefit from her strong international background and experience working with premium brands. The UGG brand performed strongly in the quarter, growing 15% in constant currency to end the year up 5%. The arrival of cold weather in January helped drive sales of our fall winter product. As the season transitioned to spring, we experienced strong sales in our casual shoes and sneakers across all channels. The use of our Treadlite technology in these categories is proving to be a differentiator for the brand, and we have already received a favorable response from wholesalers to our spring '17 offering. For the quarter, unit sales for UGG increased mid teens with non-core units up over 20%. This demonstrates once again demand for UGG remained strong and that more than ever consumers are turning to the brands for its full product assortment. As we look at fiscal '17, we're excited about the products we are bringing to market. This year, our major focus is on the re-launch of the UGG's Classic Franchise. Anchoring this re-launch is the New Classic, which will be supported with robust marketing, showcasing the water and stain resistant treatment and the comfort and traction delivered by a Treadlite outflow. Our plan for fall '16 includes more than just a new classic. We also have our Classic Slim, Luxe, and Street Style to round out a more complete Classics franchise. Collectively, these styles give us the most diverse assortment of classics ever. This breadth allows us to target a broader range of consumers with Classics through a variety of price points and silhouettes. Based on the success of Slim and Luxe in our DTC channels last fall, we know that these styles expand the wearing occasions of Classics and create exciting appeal to both new and existing consumers alike. Wholesalers and distributors are also excited about the new classics franchise and have booked slim styles like the Kristen and the Amy as top 10 styles. Beyond re-launching the Classics franchise, we are also continuing our momentum within women's casuals, fashion, and weather categories along with attacking men's, kid’s, and lifestyle. In women's last fall, we entered the rain boot category for the first time and had strong demand. For fall 2016 we are building on our success in this category with a much wider and deeper rain collection in both wholesale and in DTC. In men's, we have compelling new product that incorporates Treadlite as well as a more robust offering of casual boots and shoes like the Neumel that infuse the comfort of our slippers that can be worn outside the home. In the life style category our home and loungewear businesses continue to grow and we're excited about testing and outer wear collection this fall. To help elevate the brand, we recently signed Rosie Huntington Whitely as the first ever UGG global ambassador. Rosie is one of the world's most recognized models and top style icons. She has a deep love for UGG and we look forward to working with her to leverage her extensive reach to showcase the brand globally. We're also excited about the launch of Koolaburra this fall. With Koolaburra we now have the ability to attack the sub $100 sheepskin boot market. This is a market that we have to create, but have not competed in with the UGG brand. Koolaburra will start with a small launch into a few major account. Our market research indicates that the sub $100 sheepskin market represents a significant global opportunity. We are viewing this year as the way to assess the market opportunity and gauge consumer reception to the brand. Moving on to our Performance Lifestyle Group. HOKA ONE ONE continues to successfully penetrate the running market growing 44% in constant currency in the fourth quarter and ending the year with 65% growth. The Clayton, one of the brand's latest most innovative products yet, showcases the power of the brand in delivering ultra lightweight maximum cushion performance running shoes through its speed cushion platform. The Clayton is helping HOKA win with women a key initiative for the brand. Sales of the women's Clayton have been strong, which is a great sign as we look to further balance the brand by gender. The authenticity that HOKA has built in such a short time is remarkable, and at this year's Iron Man in California and Texas, HOKA was the most worn shoe brand ahead of ASICs, Brooks and Saucony. As we look to continue to build our strength with athletes, HOKA was recently named the official shoe sponsor of the Iron Man U.S. Series. As you can see we are focused on building the brand's awareness and see excellent short and long term opportunities. Teva grew 11% in the fourth quarter in constant currency and 7% for the year. The brand continues to have success appealing to a more modern millennial consumer with its sports sandals and closed-toe footwear. The brand is also expanding its international presence, particularly in Asia Pacific with strong growth in Japan and South Korea. This spring, Teva launched a new series of sports sandals called Terra-Float. This series add performance elements to our sport sandal categories that improve functionality and comfort. Sell through has been strong, indicating that Teva has a new franchise to get behind in spring '17. Sanuk sales declined 2% in the fourth quarter and 7% for the year. Fiscal 2016 was a challenging year for the brand and to reinvigorate the brand and improve operational efficiencies we recently relocated Sanuk to our corporate headquarters in Goleta. The move continues to go smoothly but it will take time as we transition the team and rebuild in fiscal '17. Turning now to a review of our channel performance and an update on the initiatives we announced last quarter. Beginning with our Direct-to-Consumer channel, we're pleased to report that our DTC comp was up 2.6% in the fourth quarter. The growth was led by strong performance in eCommerce offset by declines in our retail stores, particularly concept stores. Once again, the decline in traffic from international tourists impacted performance. Excluding our five most tourists impacted concept stores, the DTC comp was up 6.3%. We're encouraged by a positive DTC comp especially since ASPs were pressured by the continued promotions of core classics. For the year DTC sales increased 7.4% in constant currency and the DTC comp finished down 1%, although notably it was up 2.7% excluding our five tourists driven locations. In February, we announced efforts to optimize our retail store fleet. To that end, we've identified a total of 24 stores for closure, not including any relocation. In the fourth quarter we closed three of the 24 stores and the remaining 21 are targeted for closure in fiscal '17. The goal of our fleet optimization is to boost overall fleet productivity and reposition the brand with key relocation. Retail remains an important element of our Omni-Channel strategy and we've identified 15 new locations globally to open in fiscal '17, comprised of a mix of concepts and outlets and high visibility, highly traffic locations that we believe will deliver strong return and provide the opportunity to further showcase the strength of the UGG brand with our new store design. Now to our global wholesale business, wholesale and distributor sales increased 14% in constant currency in the fourth quarter and increased 5% for the year. The fourth quarter increase was driven by an increase in both closeout and regular price sales for the UGG brand, expanded distribution with HOKA and Teva, as well as a brand wide shift in orders from Q1 fiscal '17 into Q4 fiscal '16 in advance of our business transformation systems implementation. As part of our increasing strategic focus in this channel, we announced last quarter plans to rationalize our wholesale account base to ensure the UGG brand's premium positioning is being reflected in the marketplace. To this end, we implemented minimum order quantities to improve our product assortment at small independent. To date, we have selectively exited approximately 200 accounts. The goal of rationalizing our wholesale account is to make sure the breadth and presentation of the UGG product line is being properly represented and to adjust our distribution strategy to be in tune with the ongoing changes in consumer shopping pattern. Last quarter we announced our wholesale product segmentation strategy. We've classified accounts into pinnacle, premium and corridors across the fashion, lifestyle, sports and outdoor channels and we'll being to sell specific products appropriate to each of them. Through this process, we've also identified wide space for channel-specific product, which will help us open accounts in channels where we're underpenetrated as well as expand doors with accounts and in markets where we currently have limited presence. While still early, segmentation is creating new distribution opportunities for fall 2016. This brings me to our order book. Our backlog at March 31 was down 4% compared with the same date a year ago. We're pleased with this result given the challenging retail environment and the difficulties we experience from weather this past fall and holiday. As a reminder, our 3/31 backlog only includes orders from wholesalers and distributors for April through December. This backlog figure represents less than a third of our total revenue and does not include our DTC channel all the fourth quarter or any in season at once orders. Looking forward, we believe our brands are well positioned to grow with innovative products in the pipeline, strategic distribution opportunities and new leadership in place. As CEO my immediate priorities are driving excitement by elevating the design of product and fueling innovation and speed to market, driving desire by connecting with consumers digitally through targeted marketing and robust eCommerce capabilities, driving efficiencies by continuing to streamline the organization and improve our operations and driving growth by optimizing new distribution opportunities globally. I am very excited about the team of talent employees we have around the global. The new organizational structure combined with the leadership we have in place gives me great confidence. I look forward to working with the team to unlock the value of these initiatives. That said, we're approaching fiscal '17 conservatively and we're reviewing it as a transition year for the company given the reality of the marketplace and the time it will take for our new leadership to make an impact. So more than ever, we remain focused on the opportunities in front of us and are confident in the direction of our brands. With that, I'll now turn the call over to Tom who will walk us through our financial performance and outlook.

Thanks Dave, and good afternoon, everyone. Today I'll take you through our fourth quarter and fiscal year 2016 results in greater detail and provide an outlook on the first quarter and fiscal 2017. Please note throughout this discussion where I refer to non-GAAP financial measures, I am referring to measures before taking into account restructuring and other charges incurred in the fourth quarter. Also note our non-GAAP pro forma results are not adjusted for constant currency. A reconciliation between our reported GAAP and the non-GAAP pro forma results can be found in our earnings release that is posted our website under the investor information tab. Now to our results for the fourth quarter, starting with revenue, in constant dollars revenue increased 12% to $383 million up from $341 million last year. On a reported basis, revenue was up 11% to $379 million. In constant dollars by brand, UGG revenue was up 15%, HOKA up 44%, Teva up 11% and Sanuk down 2% versus last year. Our revenue in the quarter exceeded guidance by nearly $14 million. This upside was driven by an $8 increase in wholesale and distributor sales due to more units than expected being sold and a $6 million increase in sales in our DTC channel driven by better than expected DTC comps. For the full year in constant dollars, revenue grew 6% to $1.92 billion up from $1.82 billion last year. As reported, revenue was up 3% to $1.875 billion. The increase in revenue versus last year was driven by a 2.6% increase in wholesale and distributor sales and a 4% increase in DTC sales. Non-GAAP gross margin was 42.3% in the fourth quarter, compared to 44.7% last year. For the quarter, the change in gross margin versus last year was driven by a higher proportion of closeout sales, the continued promotion of classics as we evolve to the new classic and FX headwinds. For the year, non-GAAP gross margin was 45.4% compared to 48.3% a year ago. We had roughly a 200 basis point decrease due to increased promotion closeouts and a 140 basis point decrease from FX headwind. These gross margin headwinds were offset by a 50 basis point improvement from lower input costs primarily sheepskin. Non-GAAP SG&A was 40.8% of sales in the fourth quarter, compared to 44.5% a year ago. For the year SG&A was 35% compared to 36% a year ago. For both the quarter and the year, the year-over-year improvement was primarily due to lower incentive based compensation. For the quarter, non-GAAP earnings per share was $0.11 versus $0.04 a year ago; this is ahead of our guidance of $0.07 and was driven by higher revenue, partially offset by lower planned gross margin. For the year, non-GAAP earnings per share were $4.50 compared to $4.66 last year. The decline in earnings per share was caused by a greater than normal level promotion due to unseasonably warm weather that impacted UGG sales, FX headwinds created by the stronger U.S. dollar and an increase in Classics promotion as we evolve to the new Classic, partially offset by lower incentive-based compensation expense. During the quarter, the company incurred restructuring charges of $25 million due to retail store closures, office consolidations and software impairment. We also incurred other charges of $9 million that related to inventory write-downs, asset impairment and compensation related expenses. Inventories at the end of Q4 were $300 million, an increase of 26% over the same period last year. This was in line with our expectation. As a reminder, our inventories are elevated relative to a year ago due to lower sales recorded in the third quarter. The majority of this elevated inventory consists of UGG weather, slippers and casual boots that are being carried over into the fall 2016 line. We have reduced feature buys of this product and still expect to manage our inventory down to more appropriate levels by the end of our second quarter fiscal '17. During the quarter, the company repurchased 441,000 shares of common stock for a total of $25 million. For the full fiscal year, the company repurchased $1.42 million for a total of $94.2 million. As of March 31, 2016, the company had $77.9 million authorized repurchase funds remaining under its $200 million stock repurchase program announced in January 2015. As Dave mentioned, total company backlog at March 31 was down 4% compared to the same period last year. Directionally as a percentage, the UGG backlog was down slightly more than the total company. While not surprising, given our efforts to rationalize our wholesale account base and exit accounts, additionally as many in the industry have pointed out, wholesalers have been more cautious with their order books and are looking to place more at once business. Now moving to our outlook for fiscal 2017; given the seasonality of our business, the changes that are taking place in the industry and the impact that weather has historically had on our sales, we believe it is prudent to move to a range for our first quarter and full year forecast. For full fiscal year '17 we expect revenue to be in the range of flat to down 3%, compared to 2016 levels. Included in our flat sales assumption is modest improvement in the weather conditions relative to those experienced in the third quarter ending calendar December 2015, flat global wholesale and distributers with reorders and cancellations netted out, flat direct-to-consumer comps and improvement in the promotional environment with fury in it sold. Included in our 3% decline assumption is similar weather conditions to calendar 2015, a mid single digit decline in global wholesale and distributor sales due to net cancelations and lower unit sales, a low single digit decline in DTC comps and a similar promotional environment to last year. In both scenarios we expect six net store closures and expect to end fiscal '17 with 147 stores. Note the majority of the store closures will occur after the new store opening. By brand, we expect UGG revenue to be in the range of flat to down 3%, HOKA to grow approximately 20% to 30%, Teva down low single digits, Sanuk down mid single digit and Koolaburra to be approximately $10 million to $15 million. With respect to gross margins, we expect full year gross margins to be in the range of 47% to 47.5%. This represents an improvement of roughly 200 basis points over last year's pro forma gross margin. This has been driven by a 100 basis point improvement from lower sheepskin prices negotiated for this year, 50 basis point improvement from supply chain efficiencies and potentially up to 80 basis point improvement from the less promotional environment, slightly offset by 30 basis points of FX headwinds. SG&A as a percentage of sales is projected to be approximately 37% due to no revenue growth and increased compensation expense. While this results in deleverage in today’s challenging environment we continue to review our operating structure and are committed to driving efficiencies in the organization. For the full year earnings per share is expected to be in the range of $4.05 to $4.40 on a share count of $32.5 million. This excludes any pretax charges that may occur from any further restructuring charges, which we anticipate could be up to $15 million in fiscal '17. Capital expenditures for the fiscal year are expected to be $60 million, approximately $27 million from new DTC infrastructure, $13 million in facilities, $10 million is for maintenance CapEx and $10 million in IT related CapEx. For the first quarter on a reported basis, we expect revenue to be down 20% to 25%, compared with the same period a year ago. While these percentage were large, Q1 is our smallest revenue quarter and the decline in revenue is a result of a shift in orders between quarters and softer retail environment. We had orders shipped between Q1 fiscal 2017 into Q4 fiscal 2016 in advance of our business transformation implementation and we expect a shift in orders from Q1 into Q2 fiscal 2017 due to the timing of new product launches. As a result, we expect diluted loss per share of approximately $2.10 to $2.20 compared to a diluted loss per share of $1.43 last year. As a reminder a significant amount of our operating expenses are fixed and spread evenly on an absolute basis throughout each quarter. I’ll now turn it back over to Angel for his closing comment.

Thanks, Tom. While during the past 11 years, I've had a good fortune of working with an incredible group of people, build a very special company. It has been a privilege of serve as Chief Executive Officer and I want to thank everyone who supported me along the way, starting with the entire Deckers family and Board of Directors as well as our world-class retail partners and suppliers and finally our analysts and our shareholders. I appreciate the interest you’ve shown in the company, although I can't say I am going to miss addressing you on a quarterly basis, but as Chairman and of the shareholder in the company. I do look forward to assisting Dave and the Executive Management Team in building on the strong market position and solid financial base that we've established. Operator, we're now ready to take questions.

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Jonathan Komp from Robert W. Baird. Please go ahead.

Yeah, hi thank you. If I can may be just first clarify the wholesale shipment timing factor, it sounds like part of it was earlier shipments and then part of it as later shipments into the second quarter in terms of timing. How much was the piece of the shift into the fourth quarter of 2016?

Hey, Jonathan this is Tom. It was roughly $10 million that shifted from the first quarter into the fourth quarter and that was purposeful. We really wanted to make sure we got those shipments out to the customers, so they could turn at retail because we were getting ready to go live with our business transformation effort.

Great. Thank you for that. And then Dave may be a bigger picture question. I know you talked a little bit about the segmentation opportunity for the UGG brand and it sounds like may be some of that opportunity is still being developed at least in terms of how you see it playing out. But are there any specific channels or different areas of the wholesale market that you see particularly as being underpenetrated or how should we think about or what type of opportunity that segmentation work might bring.

Yeah, happy to speak to that. It's in the early days of development, it's something that Stefano and I and the UGG team have been very focused on over the last four to five months strategically mapping out the right marketplace strategy for North America. And inclusive of that is up -- is identifying wide space opportunities. So if you think about, for example, the outdoor channel, the sports lifestyle channel, we're very strong within the Fashion and Department Store channel, but we believe there is an opportunity for the brand to extend its reach to new consumers in the outdoor and sports channel. So we're having initial discussions with those key players, but it takes a while to develop the product and the marketing approach to be successful in that channel. So we're going to be doing some testing this fall in holiday in some of those key accounts, and then it’s really a long-term strategy that you’ll see come to fruition probably more in fall '17.

Okay. Thank you.

Yep.

Our next question comes from Taposh Bari from Goldman Sachs. Please go ahead.

Hey, good afternoon, everybody. First, Angel congrats on everything that you've done at Deckers and good luck in your future endeavors.

Thank you.

I guess a high level question first in terms of the UGG brand's position particularly within the wholesale channel in the U.S. At times of controversy, there's always -- there's always a lot of moving parts, but the backlog commentary sounds pretty encouraging from my perspective. I would love to get your opinion on where the -- how your key wholesale partners, what level of commitment they have from your perspective to the UGG brand after a challenging season, and how they are interpreting some of the changes that you're making going forward?

Yeah. So we've obviously been working very closely with our key partners. We're fortunate that we have very strong relationships with our key partners that have been built over the year. And going through the challenges in Q3, coming out of that and planning for this coming fall and holiday, Stefano and the team, they've been very close with those key accounts in managing the future going forward. They have certainly challenges that they're facing with regard to consumer traffic patterns and just in an overall marketplace malaise, but they understand the importance of UGG to their success and we've been working very closely with them to make sure that we have the right assortment going forward into broader assortment based off the new initiatives that we put into the Classic franchise. And so, they're confident still in the UGG brand, and we're still a key player for them, but the challenges they're seeing in a macro level are making things a little bit more challenging. And as I'm sure you can understand across the Board, department store open to buys are shrinking, they're looking at more of an at-once business versus their pre-booked business, which is why I think our pre-book is down 4% is actually a healthy number compared to what the environment looks like right now. So continuing to work with them closely, our goal overall is to provide the consumers in the marketplace the best product and the best brand experience we can. And as part of those objectives, we are taking a look at our marketplace strategy with a goal of elevating our presentation in key accounts, elevating that experience, and then cleaning up some of the distribution that quite frankly we think is not a positive representation of the brand. So, as you heard on the call, we're going to be closing roughly 200 doors, that’s strategic. The approach there is to make sure that we continue to elevate the positioning of the UGG brand, look for new distribution opportunities, make sure that the key players are supported the way that we need them to be, and they're representing the brand the right way, and then also looking into other opportunities in different channels as I mentioned as well. So it’s a long term strategy. You're going to see the initial stages of that take place this fall, but continuing to focus on the premium position in the UGG brand, we don't want to do anything to damage that integrity and every decision we make with regards to distribution going forward is going to be through that lens.

Thanks for that. It's helpful Dave. And then just a quick follow-up on the point of diversification, I know that you’ve been diversifying away from the Classics part of the UGG business. Can you give us a snapshot for what the composition of the UGG brand looks like or look like in fiscal '16 and what you expect it to look like in fiscal '17?. Thanks.

Yeah. So that's a very important discussion and something that we've been working on for quite some time as you know, and I've been nervous over the last few years about reliance on the core Classic, and we've done -- we've made quite a few changes to broaden the breadth of the assortment. So I'm actually pleased with how the things are looking for fall '17. The core Classic is looking that it will be roughly 20% of the overall business. As you know, that's down from 50%, 60% three to five years ago. The non-core sheepskin, so things like the Slim, the Luxe and the New Street collection will be about 25%. And then women’s casual and fashion is about 20% and then slippers make up the rest. So a much more balanced portfolio. It's a balance across styles which also means it's balance across consumer types and balance across price and segmentation in the marketplace, which I believe is the right platform for us going forward. It's less reliant on one key style to do all the business for us. And it also provides us with new platform that we can grow off of overtime and to iterate up those styles within the Classics franchise and they continue to get after our casual boot business as well.

Great. I just want to confirm Dave, when you say core classics, you're referring to all colors and kind of finishes within that traditional silhouette. Is that correct?

Yeah core is the classic short Ptolemy and the Bailey Bow in core colors, so black and maybe…

Okay. Thanks.

Yeah. Thank you.

Our next question comes from Corinna Van Der Ghinst from Citigroup. Please go ahead.

Hi, thank you. Good afternoon. Congratulations to Dave and good luck to you on having your next step. I believe you said you're expecting a mid single digit decline in wholesale sales for this year, can you parse out how much of that is due to the sales softened reduction and distribution versus existing accounts are getting more conservative on their backlogs and inventory management?

It's not dramatic due to the account closures. A lot of the account closures, that 200 number that we represented, overall while it’s a big number, it's a small percent of our total business. So it's more just to do with the overall situation in the marketplace. We feel very good about the product we’re bringing to market and the go-to-market strategy that we have in place. So a little bit of that number is self inflicted because we got to closing accounts, but the majority of that is due to whole partner open to buy.

This is Tom, just add to that Corinna, just to confirm we’ve got flat revenue growth guide as well as a down 3%. So another driver is the down 3% is we assume more cancellation relatively to the orders for the year.

Yeah correct.

Okay. That’s helpful and then my follow-up was just on if you could give us an update on the cost savings that you guys have discussed previously with the $35 million, it looks like your SG&A is going to deleverage this year or for the upcoming year, could you just give more details on how you do that playing out and kind of what buckets is spending area you're focused on for this year.

Yeah, the $35 million number, that was an annualized number and we think for the fiscal year in '17 we're about half way there. From a store perspective, the stores are going to close, they're going to be more later in the year. So we’ll still have fair amount of the store operating expenses for the year. I think we’re halfway there on the Sanuk and our new portion of operating expenses and we feel good where we're at in terms of reaffirming that number on an annualized basis going forward. We do have some of the reinvestment that we mentioned in fiscal year '17 as well because we do have some additional marketing we've put in to the plan this year mostly around HOKA.

Great. Thank you.

Our next question comes from Randal Konik from Jefferies. Please go ahead.

Yeah, thanks a lot. So, I guess my first question is if we think about the long term trend towards at more out one business versus a pre-booked business, how big of an at once business do you think at once can get towards and how do you think about potentially having to more for operating supply chain in a different matter? How you think about that kind of long term trend and how you might have to exchange or manage the business in a different manner is my first question.

Yeah, great question. I think the best way to answer that is really around making sure your supply chain can react to that. And so David Lafitte and the team and the operations team and generally across the company, we're very focused on adjusting our time to market and our speed to market, that includes product development timing to market being able to fast rack product from a trend perspective, but also balancing out our production over the year and working closely with our factories so that we can turn deliveries around faster, pretty mostly on core items to be able to react to trend. So, it's not prefect to where we want it to be today, but we can react pretty quickly within core styles, roughly 90 to 120 days on to partners floor so when we get into the beginning of the fall season we can still react pretty quickly to some of those key styles.

And then I guess the second question, is as you think about let’s say the department store channel distribution is reducing open to buy dollars and then may be getting just more cautious, well we've been hearing on some brands being more, using those more guarded open to buy dollars on proven winner is in a company’s line and pulling back a little bit on the risk factor side of things on newness. How do you think about as you line is getting more, so little bit more skewed and in terms of the broadening out and becoming more of a less, dependent on more style or little etcetera, are you using things like your direct consumer database and kind of giving some data to the department stores say look, this is going to be a winner. Like I guess how do you think about as these department stores continue to pull back on that open to buy business, get a little bit may be can get more conservative on the risk scale of things to get your new lines, your new direction as you buy those customers?

Yeah, it’s a great question and I think what we did last year with our Slim and Luxe products by testing those products and launching them in our DTC channels first and then being able to go to our key wholesaler comp and show them the sell through and the size scale analysis and the consumer type really helps the wholesale teams sell that product in at a much stronger rate. And the Slim is a great example. It was a top seller for us in DTC last year. It's going to be a top five style at wholesale this year and that just speaks to the beauty of having the DTC organization that is tightly connected to the wholesale team, leveraging the learning, leveraging the go to market expertise that we have, the presentation and that’s something you're going to continue to see us do is test and learn quickly and as soon as we get results, we’ll take it to wholesale but it's not a blind sell into the wholesale accounts. It comes with the analytics and the sell through data that we have through our DTC channel.

Got it. My last question if possible, the Koolaburra, I can't pronounce it, but it seems a great opportunity in terms of non-overwrapping using a different consumer or going after a different customer target? How do you think about the competition or let's say the blended slug out there that you see in Macy’s versus the pure slug business you see out there and let’s say perhaps a target, when you think about the long term distribution angle for Koolaburra, do you think more like a target slug or a Macy’s branded slug to compete it, I’m just curious.

I would say it's less the target approach. It is still positioned as a better brand within that sub $100 sheepskin boot market. So, it is going to come with the level of quality that we think is exceptional out there for those price points and we're going to stay focused on that, but we believe that there is a large opportunity in the marketplace for consumers who want quality, who want styling that fits their wardrobe and their lifestyle at a better price. Specific channels it's hard to say at this point, but I know the major footwear chains and some of the value department stores is lot of business there. That’s why we're starting this fall what I would say is more of a pilot to get out there and get a read for it and customers react to it and then we'll adjust our strategy going forward but we are also extremely mindful of the fact that we do not want this distribution to overlap with UGG. We’re segmenting the marketplace strategically and thoughtfully and we’re going to continue to elevate the UGG brand while we create an opportunity for Koolaburra.

Got it. Thank you very helpful.

Okay.

Next question comes from Mitch Kummetz from B. Riley. Please go ahead.

Yeah, thanks. So Tom, when you gave us your full year guidance you kind of framed in the context of modest weather improvement, get to flat sales, similar weather gets you down three. We're trying to understand, when you say modest weather improvement, is that a normal winter or what exactly does that mean?

That means a little better, not a normal winter.

Okay. So let's assume we had a normal winter, what’s the ability to drive better results and kind of the high end of your guidance? I think it goes back to the question about your ability to chase and on the reorder side I’m just kind of curious how you guys are planning the inventory for that opportunity?

Yeah, this is Dave. I can chip in on that. What we’ve done this year is we've taken a look at our key styles that we think there is upside in based on where they were booked and we've identified those 5 to 10 styles that we're going to take a position on in inventory to be able to react to. They're styles that will not require markdowns if things are stopped. We can carry those forward or sell them in Q4, but the biggest benefit we have now is our integrated planning organization which came with our business transformation efforts. We have a team that is focused on looking at inventory every single day addressing our demand, signal to the factories and managing the flow of inventory so that it's much more in line and that we have much more entail going into those decisions at the factories. So we can plan better for that based on trend and demand, but also react in season better than we have before.

Okay. And then I just want to go back to your question about why is Dave, there has been some chatter out there I've heard it from a number of people third that you guys might be opening Macy's this year. Can you address that? Is that something that you're looking at as part of the segmentation strategy and then also just on the Koolaburra, you talked about a pilot program this fall. You talked about what retailers are actually taking that product?

Yeah. So part of looking at the wide space and the opportunity is looking where we have the best opportunity to reach new consumers. And so we've been in conversations with Macy's that originally started around the opportunity of opening a concession at Herald Square, which actually I'm really excited to say we are going to open this fall. It's going to be on the main floor of Herald Square next to Louis Vuitton. So it's a great brand presentation to a global consumer. And at the same time we're going to be testing a premium presentation some of their top flagship doors in key accounts. It’s a very closely monitored partnership. We're also going to be testing roughly 20 to 30 doors in locations where we currently don't have distribution from our key accounts. So it's very strategic. It's very focused on brand elevating presentation. It's focused on controlling price within that channel and we think it's going to be additive to our base over time, but we're starting up with a test this year, primarily focused as I said on Herald Square and taking advantage of that opportunity in New York City. It'll be stories only. We're not selling online with Macy’s and again part of the test evolve from there. Amazon we're -- it's nothing new that we're talking to Amazon. We work with Amazon from a Deckers perspective and have been for quite some time and it's no secret that Amazon is taking share in the marketplace and becoming a major player. I think roughly 45% of searches online start on the Amazon website now. So our brand is on there now and our goal in negotiating with Amazon and working with them is to make sure that when the brand shows up on that site, that it shows up in a premium way and it's a positive experience for the consumer. It's priced right and its merchandise right. So it's early days of discussion of where we're going to land with Amazon, but it's been an ongoing partnership for some time and as we look at the realities in the marketplace and how things are shifting and where the consumer is shopping, I believe it's in our best interest to partner very closely with them and control our destiny.

And then just on the pilot program what Macy's, that’s all I have. Thanks and good luck on your pilot program with Koolaburra, I’m sorry.

Koolaburra yeah. So the major department store working with is going to be Coles. We'll be launching with Coles and again we've partnered closely with them. They understand what we're looking to do from a brand integrity perspective with pricing and positioning and placement. We think that, that consumer we know from talking to Coles that, that consumer is looking for our type of product. So we're doing a pretty significant test with them a few hundred doors. And then a couple other major box retailers that aren’t finalized yet, but I think it'll give us a good broad base test across different retailers, different consumers. We'll also be selling online at Amazon with the Koolaburra brand and on the Koolaburra website.

Okay. Thanks again.

Our next question comes from Scott Krasik from Buckingham Research. Please go ahead.

Hi, everyone. Good luck Angel.

Thanks Scott.

Could you just give a little bit more color maybe on what you're seeing in some of the big regions Japan, China and Europe and then how the bookings from a comp perspective and then how the bookings look as well for the fall in the various regions?

Yeah. So I can speak to that a little bit and Tom can jump in. Business oversees in the international business has been pretty stable. We went through a lot of the last 18 months with the China business transitioning the office, re-pricing in that market, getting a hold on consumer shopping patterns. That business has stabilized. The Japan business, as you know we've really transitioned that marketplace to be a wholesale dominant market place to DTC including concessions led marketplace to the brand is healthy and strong there. We're having great success with spring sell through and new product in the men's business. And then I would say Europe has really kind of hit a stabilization point as well. We're seeing comp stabilize in that marketplace. The transition for Germany is going well and Sergio and the team they're really focused on executing and elevating the plant. In Europe the same way we're doing in the U.S.

On the wholesale side, our international business we're really pleased with how that book is actually up -- the backlog is actually up relative to the prior year and they normally order closer to in season, so that was really pleased how that went and then we talked about the domestic wholesale business and that backlog as of that point in time is lower relative to the total company backlog, but we've been pleased with how we've been pre-booking since the date of the backlog.

Thanks Tom, and then just two more clarification. The first one Tom, can you just remind us that $50 million in excess inventory at UGG. What is the composition of that inventory again and then, Dave I think the platform diversions we saw where Koolaburra buy UGG, I know there is some product out in the marketplace, I think DSW that's Koolaburra without the UGG brand. So where are we a mad evolution in using the buy UGG monitor? Thanks.

Scott this is Tom. The majority of that excess inventory is the UGG weather product and some slippers and some casual boots, and that is being carried into the fall 2016 line. And since the last call we've also made a lot of headway on being able reduce our future buys going forward. So we still believe by the end of June, excuse me, end of September, our second fiscal quarter that our inventory levels will be more in line with our relative sales levels. Maybe still be higher relative to a year ago, but not at the same levels that our current inventory levels are.

Okay.

And with regard to Koolaburra, so when we launch this fall, it will be brand in Koolaburra by UGG, obviously by UGG is secondary. But we felt through internal conversations, internal conversations with consumers and our partners. That there obviously is equity from the UGG brand that we can use to help launch the brand. We've also looked at brands that have tried to do a sub brand in the past that weren't connected to the master brand and those are usually generally less successful. So the goal is to leverage the equity the UGG brand to let people know that it's a value brand by UGG that they can trust, use that for the launch and ultimately over time drop the UGG into stick with Koolaburra.

Thank you so much.

At the same time I think it's important to note that particularly with Andrea coming on Board now we're going to continue to elevate the UGG brand. It's premium position into a more accessible luxury space. So you'll continue to see us doing things from a product perspective, positioning perspective and marketing to maintain and elevate the premium positioning of the UGG brand at the same time.

Helpful, thanks. Good luck.

Thanks.

Our next question comes for Chris Svezia from Susquehanna International Group. Please go ahead.

Definitely and thanks for taking my questions. Angel and Dave all the best to you both, just I guess Dave question for you on the inventory in the channel, I’m just curious of your view as to where it is now? What do you see out there in the marketplace? I guess particularly as it relates to something like Bailey Bow or Bailey Buttons and the fact that inferior those products as transitioned to out of the market and the Classic call at 1.0, the idea that you're going to take some of that back into your I guess outlet channels April, May though there so that the retail channels that are out there, wholesale channels are pretty clean. Just give us an update on what you see out there and if that's still taking place in terms of those transition?

Yeah Chris, great question. We feel really good about how that transition of the Classic has gone, especially since we made a decision to reduce price earlier and clear a lot of inventory in Q3. We had less than we had planned on originally coming into Q4. For the most part, the channel is pretty clean. We are taking back a little bit of inventory that we're going to continue to use to fuel our outlet business. So we'll be running the original Classic, the 1.0 so to speak in our outlets over time at the current price \for the reduced price. There is some inventory out there, the older classic and some smaller doors and some of the Bailey Bow or Button products and for the most part when we launch in July in major account, you'll see only the 2.0 or the new Classic on the floor. It won't be sitting next to the older classic except for perhaps a few small independent accounts across the board. But generally speaking the top 10 of our account, which is the majority of our business, will be clean and it will help pure presentation of the new Classic.

Okay. And the Classic 2.0 call at the new version the pricing on that, will that go back to the historical 1.0 pricing, just thoughts on it?

Yeah the historical price of the original Classic was $160 we're bringing this one out at $165.

Okay, All right great. And then Tom for you just on the gross margin, up 200 basis points on the year, any color about the cadence about how we should think about that as it plays out each quarter?

I think Chris, what you want to consider there is between the flat scenario and the down scenario from a sales perspective. Really the only swing item is in that December quarter. We would expect some operating margin expansion in the December quarter on the low case and then in the high case we would expect more operating margin expansion in that December quarter. The fourth quarter it is a smaller quarter and there is from a basis point improvement perspective that’s the quarter that has the highest basis point improvement. The first quarter is -- that’s relatively flat year-over-year and then the second quarter, the expansion is more in line with the total year number.

Okay. And then finally just on, I think you said 80 basis points for promotional activity. I’m just curious given all the promotions that you had to run holiday of this past season, just your thoughts about to what extent you're going to either A, continue to do that or you've factored some of that to your guidance or are you just being conservative in assuming we're only getting back 80 basis points of the call 200 that we loss being promotions just curious about that.

On the down scenario we’re assuming a similar promotional environment we did to last year and on the flat scenario, we’re assuming a little bit better promotional environment.

Yeah, this is Dave, the goal of this falling holiday obviously is not to repeat the level of promotions. As we said last fall in holiday, the Classic and Bailey Bow Button promotions were one time event and the goal is to get back to normal cadence of markdowns that would be on seasonal product only and continue back to the full price carryover model that we had in the past. So, that’s why you see a little bit of conservatism in the plan as well is we want to maintain the integrity of the brand and the pricing and not have to get into a promotional environment.

Okay. Thank you very much. All the best. Appreciate it.

Okay. Thanks.

Our next question comes from Jim Duffy from Stifel. Please go ahead.

Thank you, guys and all the best Angel.

Thank you.

Couple questions for you guys, Tom do you happen to have handy the average selling prices for fiscal '16 or units?

No, we had unit growth, the average selling prices when you put -- strip the promotions away, we now had some improvement there, but the promotional environment really put some pressure on that.

Okay.

Yeah, just to kind answer the -- I think I know where you going. So ASPs if you look at for FY '16 lower than they were on the prior year, primarily driven by the lower promotions -- sorry, the higher level of promotions driving lower ASP. And then as we look out in our guidance, we are assuming a higher level ASP in the guidance because of a slightly lower level really promotion as well as bringing on the new classic which will have the higher price point without the promotion in the Slim.

Got it. Yeah, that’s exactly where I was going with that. And then Dave question for you, within your stated priorities you spoke to focus on opportunities to streamline the organization. Are you prepared to speak of some of the carriers where you see those opportunities?

Yeah we have been focused on that for the past 12 months and then when you saw what we announced with the consolidation of the brands the Lifestyle Groups relocating HOKA and Sanuk into Goleta, those transitions are still in place and Wendy and team are looking at the restructure of how to best streamline those brands. But it is something we're continuing to focus on. We're looking across the organization and our supply chain network. Skew efficiencies within the brand, making sure that our ads and drops are in line with how they should be. And generally speaking, there is a mindset of here of being more efficient, more focused on the thing that are going to matter, but we’ll be taking a quick look or a hard look I should say over the next 50, 90 days of additional opportunities where think there is efficiencies in the organization at the streamline SG&A.

Okay, and then final question if I may Dave on the retail strategy, specifically the new UGG retail format represented by Disney Springs, can you talk a little bit about that article you spoke to efforts to attract the younger demographic purpose of the stores being more directional in driving sales, help us understand where you're going with that and some of those strategic rationale behind it?

Yeah, I’m really excited about that store design and if you guys have not -- anybody that hasn’t seen that its worth taking a look at the Disney spring store we just opened a few weeks ago. It represents the new brand positioning, which we rolled out last year, which is much more California casual contemporary. But if you think about the fact that we opened our first store 10 years ago as a footwear store and we've gone 10 years with expanded categories getting into new categories of lounge and apparel and accessories, it's time to evolve our store design and our store experience for our consumer. So, it is a little bit more younger, little more contemporary, little more modern, which we think represents where the brand is today. It does appeal to a younger consumer and it takes in all the things we’ve learned over the last year with regards to service levels, customer experience and a lot of the Omni-Channel capabilities that we've tested over the last two years. So the goal is to use that as the beacon for the brand and then we will take that experience down to our wholesale partners globally through shop and shops partner stores as a part of our long term effort to continue to elevate and reposition the UGG brand.

That’s great thanks for that.

Yeah, thanks.

Thank you. I'd now like to turn the floor back over to Management for any closing remarks.

Let me just say it's been an incredible honor and privilege to be the CEO of this company. And I couldn’t be more excited and enthused about Dave Powers stepping into the role. Over the last 11 years I've had this incredible good fortune of working with so many special people to build an incredible success story in Deckers brands and we’ve created tremendous opportunity for a lot of folks. So, I look forward to continuing to assist Dave and the Management Team as we move to the next chapter and it's going to be a great ride.

Yeah, and I would just add that I’m incredibly grateful for the opportunity to look with Angel and have the support of the Board and the organization I’m very excited to work with an exceptional leadership team that we have at Deckers, the existing leadership as well as new leaders we brought in over the last 18 months. Deckers is a special place. We are best in class in a lot of ways, but most importantly as the culture and in organization and great people that work hard and get after business so, I’m very excited to take on the opportunity that is great opportunity for all of our brands and all of our people globally and were very focused on driving shareholder value over the long term and continuing to do great things at Deceker. So looking forward to it.

This concludes today’s teleconference. Thank you for your participation. You may disconnect your lines at this time.