Deckers Outdoor Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 9 speakers on the call.

Operator

Good afternoon and thank you for standing by. Welcome to the Deckers Brands Second Quarter Fiscal 20 24 Earnings Conference Call. I would like to remind everyone that this conference call is being recorded. I'll now turn the call over to Erin Koller, Vice President, Investor Relations and Corporate Planning.

Speaker 1

Hello, and thank you everyone for joining us today. On the call is Dave Powers, President and Chief Executive Officer and Steve Foshing, 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 the federal securities laws,

Speaker 2

have a listen to the Securities Litigation Reform Act of 1995.

Speaker 1

All statements made on this call today other than statements of historical fact are forward looking statements And include statements regarding our current and long term strategic objectives, changes in consumer behavior, strength of our brands, demand for our products, product distribution strategies, marketing plans and strategies, disruptions to our supply chain and logistics, are anticipated revenues, brand performance, product mix, margins, expenses, inventory levels and promotional activity and the impacts of the macroeconomic environment on our operations and performance, including fluctuations in foreign currency exchange rates. Forward looking statements made on this call represent management's current expectations and are based on information available at the time such statements are made. Forward looking statements involve numerous known and unknown risks, uncertainties and other factors that may cause our actual results to differ materially from any results predicted, assumed are informed or implied by the forward looking statements. The company has explained some of these risks and uncertainties in its SEC filings, including in the Risk Factors section of its annual report on Form 10 ks and quarterly reports on Form 10 Q. Except as required by law or the listing rules New York Stock Exchange, the company expressly disclaims any intent or obligation to update any forward looking statements.

Speaker 1

On this call, management may refer to financial measures that were not prepared in accordance with generally accepted accounting principles in the United States, including constant currency. In addition, the company reports comparable direct to consumer sales on a constant currency basis for operations that were opened throughout the current The company believes that these non GAAP financial measures are important indicators of its operating performance because they exclude items that are unrelated to and may not be indicative of its core operating results. With that, I'll now turn it over to Dave.

Speaker 3

Thanks, Aaron. Good afternoon, everybody, and thank you for joining today's call. It's great to be here with you today to discuss our exceptional second quarter, Our 2 marquee brands experienced high levels of full price consumer demand, leading to revenue increasing 25% versus last year, Eclipsing $1,000,000,000 for the first time in our September ending quarter, gross margin improving 5 20 basis points versus last year And diluted earnings per share increasing nearly 80% versus last year to $6.82 Our direct to consumer business are the fastest growing component of revenue growth in the Q2, increasing nearly 40% versus last year, with HOKA growing 46% and UGG increasing 38% as both brands experienced a greater than 30% global increase in consumer acquisition. Our global wholesale business also put up strong revenue growth in the 2nd quarter, increasing 19% versus last year, Again, driven by our 2 largest brands UGG and HOKA. Our wholesale accounts also continue to see incredible heat and momentum for our key styles across both brands.

Speaker 3

With this strong consumer demand, sell in for wholesale in the quarter included some accelerated fall seasonal shipments, benefiting our first half results We are pleased to have captured the strong momentum of demand early in the year, particularly with these products capturing high levels of full price selling As we focus on delivering the full year, I think it's important to reflect on our year to date performance. We closed out a record first half for Deckers with total portfolio revenue across all channels growing 19% versus last year, Driven by HOKA revenue increasing 27% from global strength across its ecosystem of access points, retention, increasing 29% 27%, respectively, and international revenue across all brands, increasing 23% versus last While Steve will provide further details on our financial performance and related increased outlook later in the call, I'd like to emphasize how proud we are of the continued alignment of our have strong near term performance with Deckers' long term objectives to build HOKA into a multibillion dollar performance brand, grow UGG through direct to consumer connections with elevated products and experiences, expand DDC through consumer acquisition and retention gains, can drive international growth through targeted investments. With that, let's get into the highlights of our successful first half, starting with HOKA.

Speaker 3

Global revenue in the first half increased 27% versus last year. This impressive result reflects the HOKA brand's successful marketplace management execution, which is driving more business to DDC in conjunction with market share gains from high full price sell through at our existing points of wholesale distribution. OCA revenue growth in the first half was led by direct to consumer, which increased 54% versus last year represented 38% of revenue, up from 31% in the prior year. This was aided by global increases in brand awareness According to Decker's proprietary brand tracker study, consumer acquisition, which is up 47% versus last year And consumer retention, which is up 52% versus the prior year. HOKA experienced significant growth in awareness across all major markets, With the U.

Speaker 3

S. Growing to approximately 30% and international regions on average rising to mid teens with much more room to grow. Specific to our gains in DTC in the first half, consumer acquisition in EMEA DTC nearly doubled to help achieve a 70 are in the range of 5% year over year increase in channel revenue for the region. This represents great progress for our EMEA region. And though DDC remains a relatively small percentage of in total revenue, we see this expansion as a positive indicator that HOKA is increasingly resonating with the European consumer.

Speaker 3

As we have demonstrated in the U. S, Thoughtfully building brand awareness through marketing activations and strategic marketplace presence served as a catalyst will be discussing a key strategic acceleration as the brand begins to take hold with the local consumer. To that end, HOKA recently opened its 1st European flagship store in Covent Garden in London, Giving the brand a powerful presence in one of the most influential footwear markets around the world. In the U. S, HOKA continues to deliver exceptional growth.

Speaker 3

DDC revenue increased nearly 50% versus last year for the first half, with strong growth among 18 to 34 year old retained consumers, Brand loyalty among this group is especially exciting given the increased potential lifetime value of repeat purchases. The HOKA marketing teams have done an exceptional job are building global brand awareness through compelling Fly Humanfly campaign content, connecting with consumers at HOKA sponsored events And highlighting the incredible performances of HOKA Athletes. We continue to sponsor key running events around the globe as part of our commitment to support the sport And provide a platform to showcase our innovative performance products. This includes events from 5 ks's to elite ultra marathons for all types of athletes around the world, This year's HOKA sponsored UTMB or Ultra Trail Mont Blanc World Series finals held in Chamonix, France is the perfect example of our team's 360 degree collaborative approach to building HOKA brand awareness and performance credibility. This trail running event allows us to celebrate the roots of HOKA, which was born in the French Alps, further connecting the brand with European consumers.

Speaker 3

At the UTMB World Series finals, the HOKA team set up a base camp that offered consumers the opportunity to engage with the brand in a unique way Through athlete meet and greets, 24 hour product testing and shoe personalization. We received overwhelmingly positive feedback on the experience And are already looking forward to leveraging these learnings at future events. HOKA made its mark on the event, both from a product and athlete performance standpoint, With several impressive achievements, including HOKA athlete, Jim Walmsley, making history becoming the 1st American man to win the Dacia UTMB, are in a 100 and 6 mile race that included more than 6 miles of elevation gain, completing the course in a record time of less than 20 hours. HOKA ranking tops among all brands with the most top five finishes across the series of 3 races and HOKA remaining the number one brand are worn by UTMB participants. From a product standpoint, first half HOKA growth was driven by a variety of categories and styles, which includes among others the Clifton franchise which benefited from the 9th edition launch as well as new successful lifestyle versions with suede uppers are in the range of stability staples like the Yarahee and Gaviota franchises, the latter of which launched its 5th edition during the Q2 As we are seeing increased adoption of this category from consumers, Trail and Hike Favorites, the Challenger and Anacapa franchises benefiting from new innovations are incorporated in recent updates, speed shoes highlighted by the ROCCAT X refresh and the all new Mach X and new lifestyle including the popular Solimar and Transport Styles.

Speaker 3

We remain encouraged by the breadth of category adoption across the innovative HOKA product assortment, which continues to evolve and attract new consumers to the brand. We are implementing greater segmentation across the ecosystem of HOKA will be able to access points to ensure our accounts are best positioned to serve their respective consumers and emphasize DTC as the pinnacle destination to experience the full depth For the balance of the year, the HOKA team remains focused on executing its marketplace management strategy, which includes a focus on building global brand awareness and heat to increase demand, which is helping to drive high full price sell through at DDC and across wholesale, allowing the brand to deliver healthy growth with best in class margins and inventory turns. Complemented by several new innovative product launches coming up in our Q4, we expect HOKA to continue delivering strong results for the remainder of this fiscal year and well beyond. Now shifting to UGG. Global revenue in the first half increased 18% versus last year.

Speaker 3

The brand's strong first half performance was driven primarily by high levels of brand heat, disciplined marketplace management leading to product scarcity on key styles exiting last fall and intentional pull forward of the brand's fall marketing campaign relative to past years. We currently have the most cohesive globally aligned product, marketing and consumer targeting strategy I've ever seen for UGG. Marketplace management has been a core strength of the UGG brand for some time now. The allocation and segmentation of core and popular new styles continues to serve the brand well, helping drive high levels of full price sell through. Last year, we shared that we did not fully capture demand on several key styles.

Speaker 3

As we began this fiscal year, we strategically developed targeted inventory that caters to the brand's most popular products From July 15 to August 15, we saw a groundswell of influencer public service announcements, are reminding consumers to buy UGG now. Videos using hashtag UGGs received over 25,000,000 views during that timeframe are in the U. S. Specifically, this shift helped fuel greater back to school demand with search interest increasing 46% versus last year according to Google Trends. To keep this momentum going, at the tail end of September, UGG celebrated the official kickoff of UGG season with music superstar Cardi B, whose video announcement featuring the new classic Dipper had nearly 20,000,000 views.

Speaker 3

This resulted in significant press and media coverage of our launch with influential publications such as Billboard are in vogue featuring UGG. Brand heat created by the UGG team directly translated to incredible first half results, Particularly from the global DDC Business and International Regions, which both experienced a revenue increase of above 25% versus last year. Furthermore, UGG gross margins benefited from transitional and fall products selling at full price during the Q2. This dynamic is in contrast with prior years with the brand's DDC business has historically been more weighted towards end of spring and summer products that generally carry a lower average of UGG's search interest and revenue growth in the first half as expected. We are also excited that some of the new fall franchises are beginning to resonate with consumers as well, including the aforementioned Classic Dipper, a key globally marketed style the All Gender Hybrid Weather Collection, which includes modernized are in the weather ready versions of the Tasman and New Mill and the Low Mill, a sneaker hybrid take on the original New Mill.

Speaker 3

UGG is well positioned to capture consumer demand during the holiday season with great products like these. Considering the demand we've seen thus far, We are already in chase mode for a select group of popular items and colors for which we are expediting production to ensure greater DDC inventory through the season. The UGG brand's first half growth sets us up well, especially when factoring the signals of a weakening global economy and lower consumer confidence. Given this dynamic, we are glad to have captured some demand earlier to help reduce the pressure of competing with more promotional brands during this upcoming holiday season As we seek to continue selling premium UGG products at full price. Moving on to our discussion of consolidated channel performance.

Speaker 3

Global growth was across are both direct to consumer and wholesale, with DDC being the primary driver of revenue gains in the first half, increasing are at 37% versus last year. Our portfolio experienced DDC strength relative to last year across consumers with acquired and retained increasing 29% 27% respectively brands with HOKA and UGG revenue are increasing 54% 26%, respectively regions with international and domestic revenue increasing 48% and channels as consumer demand was robust in stores and online. Additionally, we are a double digit increase in average selling price as a result of a greater mix of HOKA, higher full price selling for UGG combined with the focus are on fewer proven SKUs and more favorable foreign currency exchange rates. Regarding global wholesale, revenue in the first half increased 11% versus are experiencing a positive impact on UGG and HOKA as well as across both our domestic and international regions. Market share gains continue to be the primary avenue of wholesale growth for HOKA, which is now the top selling brand in U.

Speaker 3

S. Run specialty stores in aggregate according to 3rd party market sources. HOKA has also quickly become the top running brand with key strategic partners in applicable doors. Our teams are extremely proud of the HOKA brand's top market share achievement, which further validates the brand's performance rooted credibility. UGG wholesale performance in the first half is right in line with our strategy this year, with international regions feeling the majority of growth, while the brand maintains its strong business in the U.

Speaker 3

S. With these first half results, It is clear that our marketplace management strategies are working well, positioning our brands to excel during the holiday quarter and capture increased consumer demand Before I hand it off to Steve to discuss our results in more detail, I'll note that we also announced our plan to divest Sanuk. At Deckers, we're focused on the most effective allocation of our resources that are in alignment with long term objectives. Consumers have long valued Sanuk for its fun, innovative and comfort for us products. Over the coming months, we will work to find the right owner to support the brand's next chapter, while we continue to execute our growth priorities.

Speaker 3

Thanks, everyone. And now I'll hand it over to Steve.

Speaker 4

Thanks, Dave, and good afternoon, everyone. We are excited by the strong performance are our brands. As Dave covered, HOKA drove another quarter of strong growth led by DTC, while UGG demonstrated broad based are in the range of growth across regions and channels by continuing to captivate consumers and elevate its presence around the world. Our record second quarter revenue exemplifies the exceptional demand for our brands and we look forward to continuing this momentum as we enter our largest and most complex fiscal quarter. While ongoing macroeconomic challenges persist, we believe we are well positioned to navigate this dynamic marketplace.

Speaker 4

With a strong financial framework and in demand brands, we remain committed to building the foundation for success that drives long term sustainable growth. Now let's get into the details of 2nd quarter results. 2nd quarter fiscal 2024 revenue was $1,092,000,000 Representing an increase of 25% versus the prior year. On a constant currency basis, revenue grew 24% versus last year. Growth in the quarter was primarily driven by strong demand experienced across the HOKA DTC channel, which increased 46% versus last year And contributed to delivering total brand revenue of $424,000,000 for the quarter And broad based UGG growth across regions and channels delivering $610,000,000 of revenue with global DTC increasing 38% and wholesale increasing 25%.

Speaker 4

With the HOKA brand's performance consistent with our expectation, the out sized UGG growth in the 2nd quarter benefited from 1st, a higher level of wholesale shipments in Q2 this year and availability of inventory is more consistent relative to during the pandemic. 2nd, seeding the fall global UGG campaign earlier in the quarter, Reminding consumers of the scarcity that took place in the prior year, which created brand heat and demand for those same popular styles that sold out quickly last year, Driving earlier consumer purchasing this year. And 3rd, an increased level of demand for the brand during the back to school period, Gross margin for the Q2 was 53.4%, up 520 basis points from last year's 48.2%. 2nd quarter gross margin benefited from lower ocean freight rates, favorable UGG product mix, partially driven by earlier fall demand, are in a favorable UGG full price mix, favorable channel mix with DTC continuing to grow faster than wholesale And a slight benefit from foreign currency exchange rates. SG and A dollar spend in the 2nd quarter was 358,000,000 are up 22% versus last year's $294,000,000 as we continue investing in key areas of the business.

Speaker 4

As a percentage of revenue, SG and A was 32.8% versus 33.6% in the prior year, earlier consumer demand and timing of certain spend. Our tax rate was 23.8%, which compares to 21.2% for the prior year. These results culminated in diluted earnings per share of $6.82 for the quarter, which is just over $3 above last year's $3.80 diluted earnings per share, representing EPS growth of 79%. This increase in diluted earnings per share was approximately evenly split between gross margin benefits and higher revenue, with a small benefit from a reduced share count resulting from the share repurchases made over the past year. Turning to our balance sheet at September 30, 2023, We ended September with $823,000,000 of cash and equivalents.

Speaker 4

Inventory was $726,000,000 During the Q2, we repurchased approximately $185,000,000 worth of shares at an average price are in the range of $534.53 As of September 30, 2023, the company had approximately $1,100,000,000 are remaining authorized for share repurchases. Now moving into our updated guidance for fiscal year are in the range of 20 24. We are increasing our full year revenue guidance to be approximately 4.025 are approximately 11% versus last year. From a brand perspective, we now expect UGG growth of mid single digits, We still expect full year HOKA revenue growth of above 20% with 3rd quarter percentage growth anticipated to be slower Due to this year's timing of product launches being weighted towards the Q4 and we have reduced our expectation for Teva due to softening macro backdrop. In addition to our fiscal year 2024 updated revenue outlook, gross margin is now expected to be in the range of 50 are in the range of 2.5% to 53%, reflecting the strength of UGG full price selling in the 2nd quarter as the brand was able at 64.5% as we continue to invest in key areas of the business.

Speaker 4

Operating margin is now expected to be approximately are in the range of 22% to 23%, and we are increasing our diluted earnings per share expectation to now be in the range of exclude any charges that may be considered one time in nature and does not contemplate any impact from additional share repurchases. Additionally, our guidance assumes no meaningful deterioration of current risks and uncertainties, which include, but are not limited to, changes in consumer in recessionary pressures, inflationary pressures, geopolitical tensions, labor shortages and fluctuation in foreign currency exchange rates. We are proud of the first half performance by the HOKA and UGG brands, 2 of the strongest in our industry, Which led us to increase revenue guidance heading into the back half of our fiscal year despite what appears to be a more challenging macroeconomic environment. The HOKA brand's global gains and awareness combined with the early fall demand we are seeing from UGG give us the confidence to achieve this exceptional outlook. Thanks, everyone.

Speaker 4

I'll now hand the call back to Dave for his final

Speaker 3

remarks. Thanks, Steve. HOKA and UGG have delivered incredible results for the first half, and we believe our company is well positioned to deliver on the increased full fiscal year objectives Marketplace management remains paramount to the ongoing success of Deckers and our continued ability to buck are in the range of our brands. Our proficiency in the implementation and delivery of strategic objectives is what truly differentiates Deckers as an organization, allowing our brands to create lasting consumer connections. We are focused on continuing to deliver meaningful consumer experiences with great products and dedicated to doing so with our long term objectives at the forefront of everything we do.

Speaker 3

This approach alongside our flexible operating model, financial discipline, innovation across fashion and performance brands And our purpose led culture are what empowers our highly engaged employees to deliver exceptional results and shareholder value. I'd like to thank our entire executive leadership team and all of our employees across the organization for their continued dedication to Decker's values As our company seeks to do good and do great. For more information on these efforts, I'd encourage you to read our forthcoming FY 'twenty three Creating Change report, Thanks everyone for joining us here today and thank you to all of our stakeholders for your continued support. We look forward to continue sharing the exciting future ahead of Deckers. With that, I'll turn the call over to the operator for Q and A.

Speaker 3

Operator? Are ready

Operator

to take questions. Our first question comes from John Kernan from TD Cowen. Please go ahead.

Speaker 5

Excellent. Congrats on a phenomenal quarter. And I guess, wanted to Hone in on UGG, obviously tremendous momentum as you go into Q3. Q3 is almost 50% of the full year sometimes in in terms of total revenues. So just curious, given all the momentum you see, particularly in DTC in Q2, how should we think about UGG in the back half of

Speaker 3

Yes, this is Dave. It's a great question. First of all, I want to recognize the momentum that you called out that the UGG brand experienced in Q2, the team did a phenomenal job of recognizing the opportunity earlier in the year, capturing Demand that we left on the table last year, cleaning up the marketplace, putting some exciting activations in place with Cardi B And other influential partners for that brand. And the buzz is something that in my experience at the company I have never witnessed before. It's palpable.

Speaker 3

The full price sell through the health of the marketplace, the teams just collectively have done an amazing job across the globe to set this brand up for success. And We're really excited that we were able to capture some demand early in the season before holiday shopping and before there's potential slowdowns in the marketplace. So We're set up incredibly well. We're optimistic that this is going to continue for us throughout the year. We're mindful of the fact that this could be a challenging marketplace.

Speaker 3

So We're not naive to that fact, but we are prepared for it. As we mentioned in prepared remarks, some of the key styles that We put into the marketplace this year have sold out or sold very well so far. We're in a bit of a chase mode in some of those styles. But I think across the board, we feel really confident that we have a breadth of products across many silhouettes are in place. We have incredibly powerful campaigns and activations across the franchises and the brand.

Speaker 3

We have an exciting new launch of UGG stream, which is the winter lifestyle collection that we're going to start investing in, in a deeper way. We have great relationships with our wholesale partners. They need us, are in the range of the most important markets. We want to stay above the promotional marketplace. So we don't want to get caught up in that.

Speaker 3

We want to maintain a healthy and clean marketplace can continue to drive real strength through our DTC channel. And that's our strategy and it's working well so far. We're really excited how The fall season has kicked off and we feel really good about how it's going to continue.

Speaker 5

Got it. Maybe one quick follow-up just on the margin profile in the back half of the year. It looks like SG and A dollars

Speaker 3

Yes, I'll let Steve get into the details. But the top four things that we're investing in, which is similar to what we talked about earlier in the year, which is important for us to maintain this level of growth going forward and to be able to continue to grow these brands is really around people, talent and culture. We're a big believer that our culture is one of our secret sauce components, so to speak, and that we have incredibly motivated and collaborative teams that are fired up to win. We're continuing to invest in innovation. We have a powerful innovation pipeline that we want to continue to bolster where they're at.

Speaker 3

We're not alone there. We have some work to do there, but we want to be providing our teams with the right level of visibility so they can run their businesses effectively And leverage AI technologies coming down the pike and then continue to heavily invest in marketing. We feel that In a constrained environment and a lot of other peers that are struggling with inventory and promotions and lower margins, With our profile right now, we have an opportunity to continue to take share in this environment and we're going to stay aggressive with marketing dollars to do that.

Speaker 4

Yes, John, this is Steve. I think just to kind of further on Dave's comments, what we've said now for a number of years is that, I think, 1, we're very well financially disciplined as an organization and we're very careful about where we're placing and I think an indication of that is the increase in the operating margin that we're now guiding to. I think we're taking these times of performance and using that to invest in the business. And that's what we've been saying for the past have been in the right places. We know that sales have been outpacing are in the process of making the proper investments, as Dave said, in the business that continue to drive these levels of sales.

Speaker 4

I think we're demonstrating marketplace management, disciplined investment approach, and that's the way we're operating. And even with that increased investment, leveraging, some of the increase in the gross margins to are leveraging some of the increase in the gross margins to lift our profitability for the year. So, we're doing it in a very are strategic, thoughtful, disciplined way. Yes. And the

Speaker 3

last thing I would add on that, as you guys know, we've worked hard to ensure that more of our SG and A is variable versus fixed. And so we maintain a pretty agile flexible model should we need to cut back on some of those things in the second half of the year.

Speaker 5

Got it. Thank you.

Speaker 6

Thanks, John.

Operator

Our next question comes from Jonathan Komp from Baird. Please go ahead.

Speaker 7

Yes. Hi, good afternoon. Thank you. I want to ask about HOKA, just a follow-up. Could you maybe share a little more detail on the product shifts you mentioned and how that might impact the growth rates in Q3 and Q4.

Speaker 7

And then as we think about Really the pipeline into next calendar year, just how are you thinking about staying ahead of the competition? Everyone seems to be are chasing the maximalist cushioning trend. And any color what you're hearing from your retail partners in terms of some of the order trends?

Speaker 3

Yes, great question. I'm glad you asked that. So to put a little bit color on how we're thinking about the launches in the second half of the year, We're strategically pushing launches into the Q4 timeframe. That's when we really get into the beginning of spring summer season when running starts to kick in again. Traditionally, the holiday season is kind of less exciting, so to speak.

Speaker 3

Still a lot of volume to do, but we want to make sure that we come out really powerfully at the beginning of spring next year in our Q4 timeframe. It also allows us to stay out of the fray of a promotional marketplace in Q3. So we're anticipating that particularly in the athletic space where there is in a lot of situations where it's over inventoried with a lot of inventory in the channel and the slowdown of the marketplace, we feel We're better to stay above the fray, so to speak. I don't want to launch 2 of our major, major innovation launches coming in Q4 and Q3 when there's a lot markdowns and promotions going on. So the teams have strategically decided to push those launches to Q4.

Speaker 3

I can tell you the innovation that is coming out in 2 of our launches, they're incredibly exciting. And then we'll address how the oversized trends are evolving for us and we're taking that very seriously. We don't want to lose that dominant position in the category that we created. There is a lot of activity obviously from competitive brands going in that direction. Some good, some bad, but The bottom line is we're not as differentiated as we were 3 or 4 years ago with that type of profile.

Speaker 3

But our technology, our Different foams, different compounds, etcetera, continues to be at the forefront of everything we do. And but we are addressing the fact know people may want a little bit of low profile. They want different uses for their product. We think there's a tremendous opportunity in trail and hike. We're going to go heavy after that.

Speaker 3

We have a dominant So it's top of mind for the teams. I think Stefano, as the Interim are in the position of the HOKA brand with the brand leadership team has done an exceptional job of fast tracking our innovation pipeline and We're excited to unveil some of those new concepts coming up in Q4.

Speaker 4

Yes. And I think, John, just to add on that, is this aligns with the strategy that we've laid out. So this is not a change. As we've said, the importance of controlling the marketplace, product in the marketplace, maintaining full price selling, continuing to build brand awareness aligns with our full year outlook. And so we're continuing to operate on that.

Speaker 4

No change on that front. As you can see by Q2 performance, seeing still good growth with the HOKA brand and really impressed with what we continue to deliver, But we're going to be tight on marketplace management and that's our strategy and that's what's paying off.

Speaker 3

Yes, I think the theme here is really maintaining a healthy marketplace for the HOKA brand. And listen, HOKA is having an exceptional year. You saw the results in the first half of the year On a promotion event or level, we were dominant at the UTMB event this year in Chamonix, France. Our athlete won the race, 1st American male winner ever in that contest. 2 weeks later, our athlete won the Ironman Championship in Nice, France.

Speaker 3

Actually just today it was announced by footwear news that HOKA is the brand of the year. You're seeing the increases in awareness and acquisition from our consumers, our full price selling is exceptional. We're still dominant in the run specialty channel. We've got tons of momentum here and we want to make sure that it doesn't get ahead of us and that we manage the marketplace effectively to continue to drive strength in And I think the strategy that the teams have laid out and the cadence of product introductions and innovation is spot on. So Lot of reasons to be excited, but at the same time, we're not naive to the fact that this sector is having some challenges right now.

Speaker 3

And in Q3 is people are talking about the fact that it may be really tough. We haven't quite seen that just yet. But again, it's a sector economic issue that we're going to pay close attention to, but we want to maintain scarcity in the marketplace, full price sell through and keep this brand moving at a healthy pace.

Speaker 7

That's very, very helpful. Thank you. And Steve, if I can just ask one follow-up on the financial guidance for the year. If I look at sort of the implied second half performance, It looks like you're implying operating margins down maybe close to a couple of 100 basis points year over year and EPS Just could you help us make sense of that after the first half? Obviously, such strong year over year growth rates on both of those.

Speaker 7

Thank you.

Speaker 4

Yes, I think it's a good question. And yes, as you're looking at second half, part of this is recognizing that part of Q2 was benefiting from earlier sales of planned sales that we had in the second half of the year, right? And so, While we're raising our overall year, it's not the full beat of that what we've experienced in Q2 because some of those sales at this point in time appear to be timing. We'll see how the marketplace plays out kind of in the back half. But combined that with some of the timing of are in the back half sales moving into Q2, passing through what we think is a full year lift.

Speaker 4

It is taking some of the sales out of the back half a little bit. But with the overall improvement in the year, and as you know, John, I keep saying we're focused on the year, not quarters, we are lifting our are in the full year. We're lifting our full year gross margin. We're lifting our full year operating margin. So like Dave said, we're managing the business for the long run.

Speaker 4

Are not managing the business on a quarter to quarter basis. We look at the full year, that's how we're guiding the full year. And some of that outperformance in Q2 is allowing us to make these additional investments.

Speaker 7

That makes sense. Thanks again.

Speaker 3

Thank you.

Operator

The next question comes from Paul Lejuez of Citi Research.

Speaker 2

And if there's any comments you can make about quarter to date. And then also on the UGG side, you had some unmet demand last year. You mentioned your chase mode again on some UGG files. I'm curious about your ability to chase and what are your assumptions for the second half

Speaker 4

Okay, Paul. Some of that was a little hard to hear. I'm going to I'll take my best shot. So, this is Steve. So, on the HOKA DTC business, strong, very strong Q2, are up 46%.

Speaker 4

And we look at that factor as the real true demand signal. We know there are going to be fluctuations with wholesale orders of when they flow. And so, we closely watch the DTC performance. And having that up 46% in Q2 is just another strong demonstration of how well HOKA is resonating with consumers. Are very encouraged by that.

Speaker 4

I think, as we've said and as Dave just articulated kind of how we're thinking about Q3 and back half, Managing the marketplace, we don't want to get into a promotional environment. We know there is a lot of competition out there that's over inventory. We're seeing a lot of promotion. Focus not in that space. We're not having to promote like other brands are.

Speaker 4

And so, how we continue to build this brand forward And then build toward a bigger 4th quarter type increase on percentages terms as we have those new style intros planned for Q4. And then your other second question was chasing UGG. Do you want to go, Dave?

Speaker 3

Yes, I'll talk about that one. So I think one thing I think is important to If you go back 3 or 4 years and you look at the UGG brand and what drove the business, it was really 1 of 2 styles. It was all basically are in the same store. And outside of classic, we had varying degrees of success with other styles. If you go back 7, 8 years, it was the Bailey Beau and Bailey Button.

Speaker 3

But we were more, quite honestly, a one trick pony in those days. The way the brand has evolved the assortment is we have now 5 to 6 top selling franchises. If you look at The Tasman, the TAS platform, the Ultra Mini, the Ultra Mini platform, some of the styles like the Classic Dipper, There's a lot more assortment and variation in styles and heights and platforms, etcetera, to choose from. And the good news is that they're all resonating very well, and we have good early reads on things like UGG weather styles, the new MELD weather and are in the Classic weather program. And at the same time, the team has edited the line by about 30% versus prior year.

Speaker 3

So you have inventory that we can put traditionally went into lower selling styles. We put that inventory into the top 5 to 10 styles this year. With Ann's help on getting the team's focus and putting more emphasis behind these key styles from a marketing perspective, We've also been able to put more depth in those styles and inventory. Now a couple of them, we are selling faster than expected due to the earlier demand, but teams have reacted quickly. We have the ability to chase some inventory, not a ton, but I think going into the back end of will be in good shape on some of these key styles.

Speaker 3

So we feel like we have the inventory to do what we need to do. It's not a bad thing to leave a little bit of demand on the table if are in the same time, we have a very exciting launch with UGG Weather Extreme, the UGG Extreme collection coming in, which is are in a new category of focus for us going forward. So I think we're in pretty good shape, that we have the inventory in the right styles, which we didn't last year. And I think the teams have done a great job of adjusting And cleaning up the assortment, putting more power across the 5 to 10 styles that are really driving the growth.

Speaker 4

Yes. And I think, Paul, just One of the things with the strength that we've seen in Q2 on some of the styles that have been very popular and we're are selling down the inventory. We are looking to expedite some of that back in, but there's a limit, right? And we won't necessarily be able to chase every sale nor would we want to chase that we sell. So we'll see how things play out, but we're set up very well.

Speaker 4

It is the driver of our full year increase.

Speaker 3

Thank you.

Operator

The next question comes from Sam Poser of Williams Trading. Please go

Speaker 6

ahead. Thank you for taking my question guys. First of all, Aaron, you've got most of it, but Teva, Sanuk and other for my normal question. And then I have a follow-up I have a whole bunch of questions.

Speaker 1

Hi, Sam. Sure. I'll start off with that. So for the Q2, for Global Wholesale and Distributor, as You noticed some of this, I think you can pull out of what we said, but for UGG, dollars 452,000,000 HOKA, dollars 263,000,000 have a $12,000,000 Sanuk $3,300,000 and that leaves you with other at just about $30,000,000

Speaker 6

All right. So just get this out of the way. With Sanuk and that you're going to are you going to take that as a discontinued operation and going into in the balance of the year or how should we think about that in the guidance and so on?

Speaker 4

Yes, Sam. So, no, we're not looking to break that to discontinued operations. So we'll continue to report it as we seek to find a buyer. So that's the current plan. Yes.

Speaker 6

Okay. And then with the way this is flowing in the back half, Was there a lot of pull forward in the UGG Wholesale business? I mean, should we expect UGG Wholesale in the Q3 would be down given how much came in Q2?

Speaker 4

Yes. So again, depending on your model, because we haven't guided the quarter. So but yes, what we're basically saying is there is a portion of wholesale orders that occurred in Q2 that you may have planned for in Q3, and that is What's leading to the increase in the UGG performance? So again, we haven't given quarterly guidance. I don't know exactly how you had it broken out.

Speaker 4

But yes, I think Safe to say that some of the increase in UGG that we've seen in Q2 is wholesale orders that were moved forward into Q2.

Speaker 3

Yes. And I think what is still to be determined is how much of the upside and we captured in Q2 was just are in the market. And so either way, I think we're positioned well, depending on how the market moves. But At this point, the demand seems strong and healthy, and we think it should continue. But as we said, we're heading into An unknown macro environment that, hard to say what it's going to look like.

Speaker 3

But we're optimistic that some of that demand was brand heat that will continue through Q3.

Speaker 6

So and then, okay. And then on HOKA, the same kind of question, given that you're moving a big launch, You're moving a big launch away or moving launches out. Does that mean that the wholesale business in Q3 would look more like Q2 and then from a maybe as a percentage, but then accelerate into Q4 and then but there's no real reason for DTC, It appears to slow down very much. I mean, that's good momentum on new product. You've launched a lot of new products in the last few weeks.

Speaker 4

Yes. So, Sam, it's a good question. And there's kind of different ways to look at it. So I think As I said and Dave has said, we haven't changed the way we're looking at HOKA for the year. So I think kind of that's most important.

Speaker 4

Remember, the underlying fundamentals of that is a very controlled wholesale marketplace, right? And so, as we think about Q3, as Dave talked about, we are are controlling wholesale in that period because we want the market to be seen as we're launching some new product So I think that's an important underlying. The other then is remember we had very large DTC comps a year ago. So when you're looking at some of those, our DTC comps last here Q3 was 100 and I think 7%. I think Q4 was like 97%.

Speaker 4

So we're coming off of very big growth quarters a year ago. So that's the other thing are going to be able to consider, right, as we're talking about this. So there's growth. Then the other thing I think to take into account is what we've said about full year growth. So as we've said full year growth, our first half has exceeded that average full year growth guide number, Which means by definition, the second half is going to be a little bit lower because we're controlling again that wholesale component of the marketplace.

Speaker 4

This is part of our strategy. Now, as we talk and some of our partners have discussed, there will be some wholesale expansion at the end of our Q4, Right. So that won't necessarily get captured in our back half, but it's a setup for next year. So again, everything is playing out like we've said. The brand continues to perform very well.

Speaker 4

And I think there are some dynamics that are in there that are important to understand. But most importantly is The brand continues to perform very well.

Speaker 3

Yes. And the last thing I would add to that is last year, we were opening new doors in Q3. So there was some door expansion. And so the setup quantities led to some of the growth in those doors this year. We're still maintaining a net neutral through Q3 on door growth.

Speaker 3

So comping that door growth last year could have a little bit of an impact on the wholesale performance too.

Speaker 6

Got you. And then lastly, Dave, you've been now how long at Deckers?

Speaker 3

A little over 11 years.

Speaker 5

Does

Speaker 6

that make you the elder statesman? No. So you weren't in charge of that collaboration.

Speaker 3

No, I was excited to see it, but I don't want to take credit for that. That was Ann and the team. Okay.

Speaker 6

All right. Thanks very much. Have a continued success.

Speaker 3

Thanks, Sam.

Speaker 4

All right. Thanks, Sam.

Operator

The next question comes from Laurent Vasilescu of BNP Paribas.

Speaker 2

I wanted to ask about Dave, I think you mentioned that HOKA International grew 44% in the quarter. If that's the case, maybe can you just give a little bit color just what you saw by region? What's driving that growth? I think you mentioned a little bit about Europe, but How did you think how did you see the growth between wholesale and DTC? Was there a spread between that internationally?

Speaker 2

And maybe Steve, I don't know if you can maybe give us some guardrails into how you're thinking about international HOKA growth

Speaker 3

Yes. So we can validate that number. I don't know that it was exactly 44%. But the bottom line is We are very excited about the growth that we experienced internationally. That's been a focus of ours for across all of our brands.

Speaker 3

The international teams are doing a tremendous job at creating brand heat in that marketplace and then also managing the marketplace effectively across TDC and wholesale. The real strength of the growth that we saw in Q2 was really DDC led, particularly in Europe, exceptional results. Now smaller percent of our total business, but we think that speaks to the health of the brand and the demand for that consumer as we're are in Europe, so there's a lot of buzz around the brand there. And we're just getting better at managing that brand from a DTC perspective, investing in that team and the capabilities over there. So really the growth is being driven primarily by the DTC channel.

Speaker 3

Wholesale is still strong, but as we said in the U. S, we're managing that tightly to create the excitement and the awareness, But still really ultimately drive the business to DDC, and that's a formula we're going to continue to lean on going forward. What was the other question? It was the 3rd question. Yes, Steve.

Speaker 4

So Laurent, I think the number you quoted was total company international DTC growth. So We didn't provide the HOKA component. So the total 44%, I think that you quoted, was Total company, international DTC growth. I think then just your question, on HOKA Trends that we're seeing are similar to what we saw in North America probably a year or 2 ago, right? So how we're seeing HOKA show up Bigger expansion or faster growth in percentage terms is another indication that that seems to be the case that we're seeing the HOKA brand Resonate with consumers, kind of starts with runners, run community and begins to build out as awareness grows, very similar trend to what we've seen in North America.

Speaker 4

So in that International arena, we're a little bit behind where we were, still very early innings for both domestic and international, but a little bit earlier on are in the same store. And that's why we're seeing those growth percentages high in total company, but you can extrapolate that to

Speaker 3

the HOKA brand as well. Yes. And the new store we opened in Covent Garden in London is off to a great start, and we're seeing that formula play out, which is a mix of performance and everyday runners and lifestyle Driving the results there. A lot of tourists experiencing the brand for the first time in our stores, our own stores and our partner stores in China continue to perform well also.

Speaker 2

That's great to hear. Thank you for that. And then Dave, I think last quarter during the Q and A you alluded to The launch of a new brand that might be small, but maybe just can you give us an update on where that stands? And with the potential divestiture of Sanuk, does that give you capacity, bandwidth, time, resources to potentially

Speaker 3

Yes, they're really 2 separate events. It's not that Sanuk was holding us back from building and launching a new brand. So we look at these separately as just fine tuning our model. Just to speak to the I'm really proud of how the teams have managed this brand over the last few years from a marketplace management standpoint. And the product right now is very, very strong.

Speaker 3

But what we've realized is that the journey to scale that brand So that it's meaningful in our portfolio, it's just too long. There's other things that we think we can invest in. And we think that this is a brand that the consumers love. It deserves a good home and somebody who can is a priority for them versus 4th or 5th brand in our portfolio. So it's a tough decision emotionally and financially, but I think it's the best thing for the company and the brand to do this.

Speaker 3

With regards to the new brand we're working on, I don't want to give away too much to our competition, but we're excited. We're going to be Taking the best of HOKA and Doug and all the learnings we have from those two brands and creating what we're calling a super sneaker brand across various categories, we have the distribution channels, we have the DDC network, we have a lot of leverage in the marketplace and some really innovative exciting product. It will be a long haul, but we think this is a space that is emerging and that we want to make sure that we have some skin in the sneaker game going forward beyond HOKA. And then as far as M and A goes, listen, we have enough organic growth here in our portfolio for the next foreseeable future in years. We're always keeping our eyes on it.

Speaker 3

We've looked at a lot of opportunities and with regards to what it would do for our company financially and workload and disruption, nothing has come across our desk that we're excited about yet. But it's always top of mind for us and we're continuing to look. But we think, listen, we have Teva that has opportunity down the road and we think we can create a new brand and launch that and see if we can make some are excited inroads with both those brands, while we focus our real efforts and attention on UGG and HOKA. Very

Operator

Our last question today comes from Janine Stichter are from BTIG. Please go ahead.

Speaker 8

Hi, congrats on the great quarter and thanks for fitting me in. Question on HOKA. Wanted to hear more about what you're seeing at some of the more recent doors that you've been in over the last few years. Foot Locker, Dick's, I think You've recently tested JD. Just curious what the sell throughs look like there and if you have any thoughts on the type of consumer you're getting, if it's helping you kind of broaden the aperture of the consumer you reach with HOKA.

Speaker 8

And then on UGG, we'd just love to hear a bit more about international. I think you talked quite a bit about international strength at HOKA, but would would love to hear more about, what you're seeing there with UGG and if the momentum is similar, versus what you're seeing in the U. S? Thank you.

Speaker 3

Yes, good question. So HOKA door performance, new doors that we have opened up are performing very, very well. I was talking to Stefano, who is overseeing that brand Right now, the new doors that we've opened over the last year and new accounts, all performing very well, high level of full price sales, have strong turns, stealing market share, run specialty stores. We have a number one position there that we're fighting know every day to maintain and we want to build out in that position, but new doors in Foot Locker and Dick's and JD, etcetera, They want more. So that's a good sign and the way that we're performing those doors is right in line with what we would hope it would happen.

Speaker 3

We're managing it tightly as we have been doing so that we maintain full price selling and healthy turns and gross margins for our partners.

Speaker 6

It's a good question

Speaker 3

on the type of consumer. Foot Locker as an example was a strategic play, not just from a volume play, but also are strategic to reach a younger lifestyle consumer, both male and female, and we're seeing that happen. I think some of the success in Q2 was probably back to school business that we hadn't really realized before. And with our focus on 18 to 34 year old consumers and college athletes, we're seeing that pay off. And so it's are excited to see high school athletes and college athletes and beyond gravitating to our brand, going to those doors, looking for the brand, making the choice of HOKA over a traditional Nike Dunk or Air Force 1.

Speaker 3

That's super exciting. We're going to keep a close eye on that because we don't want that to be a big spike and then go away. So we need to manage that tightly and the lifestyle teams are all over that and working with our accounts to make sure that it's a healthy business for the long term. And then on UGG International, similar to what Steve was saying in HOKA, UGG is an international, particularly in Europe, is at the point where UGG was a couple of years ago, really healthy strong growth. They've been working hard on local marketing activations and leveraging PR in the region and the new product is resonating extremely well across the board, but particularly with younger consumers there and it's really exciting to see.

Speaker 3

And we haven't been in this position in Europe Quite some time, but the momentum is real. The brand heat is improving. The level of acquisition and consideration for our consumers are all heading in the right direction. So we think this is an opportunity to build on this, particularly in the UK and Germany, our 2 biggest markets. And we're going to continue to play this playbook out and get more aggressive with marketing activations in the region.

Speaker 8

Great. Thanks so much and best of luck.

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Earnings Conference Call
Deckers Outdoor Q2 2024
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